As of August 2nd 2022, the Indian National Rupee stands at 78.61 against the US Dollar.
While the rupee’s depreciation or the “falling of the rupee” is seen as a major setback to India’s economic development, there are sectors that can still benefit from this depressing economic shift.
How? In this article, we dive deep into the implications of the rupee depreciation and its impact on Indian SMEs, specifically those who operate in the export industry.
Key takeaways
- What is the impact of a weak rupee on businesses?
- When does the rupee rate fall?
- How does the rupee’s fall impact MSMEs?
- Massive loss in the import sector
- Major gains in the export sector
- What are the ways businesses can safeguard themselves?
- What is hedging?
What is the impact of a weak rupee on businesses?
We know when the value of the rupee drops, inflation rises at home and businesses have to pay even more for their raw materials. Since India relies heavily on imports (crude oil, metals, electronics, etc.), the country makes payments in dollars. If the country’s currency continues to fall in value, the country will have to pay more for the same amount of goods. In the end, it is the consumers who suffer due to an increase in raw materials and manufacturing costs. But if we look at the brighter side, a weak domestic currency boosts exports, since shipments become more competitively priced and foreign buyers can afford a larger share of the goods being shipped.When does the rupee rate fall?
Multiple reasons are responsible for the sharp fall of the rupee. Primarily the dollar strength and the function of oil are considered responsible for this depreciation. Since the beginning of 2022, the rupee has lost 6.39 percent against the dollar. The currency also witnessed 1.97 erosion only in June. Here are some factors that contributed to the rupee rate’s fall: 1) When there is a higher demand for US dollars, the value of the Indian rupee goes down, and vice versa. 2) When India imports more than it exports. 3) Uncertain global conditions, for example, the Russia-Ukraine war, trigger a risk appetite for the weakening of the rupee. 4) A rise in the price of crude oil significantly contributed to the rise in India’s import bill. 5) When India’s foreign exchange reserves keep depleting, the rupee’s price falls. 6) When money is transferred from emerging markets to invest in safe havens.How does the rupee’s fall impact MSMEs?
Since India is a net importer, any decline in the value of the rupee has more of a negative impact than a positive one. Recent problems for small and medium-sized businesses (SMEs) and their investors include the COVID-19 pandemic, a slow stock market, the Ukraine-Russia crisis, the devaluation of the rupee, and rising inflation. Here are the ways both the import and export sectors will be affected:Massive loss in the import sector
The weakening of the rupee has increased the cost of imports and put pressure on the country’s current account. In this situation, imports are usually cut back because the price of imports goes up when the currency is weak. But as we have already mentioned, India is a net import country. A 20% rise in the price of raw materials has a big effect on the supply chain of MSMEs. While an increase in the price of aluminium wires and steel directly affects the motor manufacturing companies, a significant rise in the price of cotton impacts the fashion industry. This further drives up the manufacturing costs. The high rate of inflation has created a challenging situation for the owners of MSMEs. Small and medium-sized businesses (SMEs) are losing money and don’t know if raising the prices of goods will help them get back on their feet. Therefore, producers cannot predict if customers will buy an expensive product. Therefore, producers would rather operate at a loss, or even halt production temporarily. Several textile mills in Ludhiana, Punjab, which is the center of textile production in India, have stopped exporting and are now only selling in India.Major gains in the export sector
When the rupee weakens, exporters gain a competitive advantage. Therefore, analysts believe that the weakening rupee has improved the competitiveness of Indian exports. The global digitization wave provides a promising opportunity to increase revenue from services exports. When the local currency is weak, foreign direct investors can make big money by putting their money in the stock market for the medium to long term. The current depreciation of the rupee is expected to benefit Indian exporters of carpets, handicrafts, and engineering goods by as much as 10 percent. Higher oil and commodity prices will benefit industries that rely less on imports while hurting others. According to reports from the Indian Ministry of Commerce and Industry, the value of non-petroleum exports in March 2022 was 33.00 USD, registering a positive growth of 4.28% over non-petroleum exports of 31.65 billion USD in March 2021 and positive growth of 73.94% over non-petroleum exports of 18.97 billion USD in March 2020. According to a press release published by PIB Delhi, India’s overall merchandise and services exports jumped 24% in May 2022. While a weaker rupee is good news for businesses that rely on exports, it won’t help as much for those that rely on goods that contain significant amounts of imported materials.What are the ways businesses can safeguard themselves?
One of the most essential ways to deal with turbulent times in the economy is to have a corporate hedging strategy. The Reserve Bank of India has been advocating that businesses hedge their foreign currency risk. But it also claims that most imports are not protected against currency fluctuations.What is hedging?
Hedging is an investment strategy that functions similarly to insurance by reducing exposure to the risk of financial loss. In the same way that we insure ourselves against one type of loss by paying a premium to an insurance company, we can do the same thing by hedging our bets. Many business owners of medium and small enterprises lack a formal corporate hedging strategy. Instead, they depend on spreadsheets to handle their financial projections, cash flow, accounting, and stock management. The current situation cannot continue. There is no business that is immune to the effects of geopolitics, trade issues, tariffs, and more, all of which can affect the value of your currency or the prices you pay for goods and services. Many large companies pay millions to banks and consultants to get the best advice, but small businesses can’t afford to do the same. As a result of recent developments in FinTech and business super apps like UpScale, SMEs can now affordably gain access to all the essential services necessary to implement a corporate hedging strategy during a situation like the falling rupee. These include multiple currency accounts, automated payments and collections, forecasting tools, FX hedging, and risk management.What’s your Reaction?
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