The currency fell sharply by 105 paise against the dollar on Wednesday. With the trend expected to continue, how does it affect your costs at home and abroad, and how should you manage your funds?
On Wednesday, the rupee fell sharply by 105 paise — its biggest single session fall in 20 months — to close at a five-month low of 74.47 against the US dollar amid concerns over Covid-19 and the RBI’s newly announced programme to buy bonds worth Rs 1 lakh crore this quarter. These factors come on top of a strengthening dollar against the euro, which is resulting in a relative weakness of the rupee.
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Where is the rupee headed?
After peaking at around 77 against the US dollar on April 21 last year, the rupee started appreciating and reached 72.27 on March 23 this year. The move to 77 had been preceded by a sharp rally in the dollar index before the Covid-19 pandemic hit the global economy; since then, the gradual appreciation was underpinned by a fall in the dollar index, and a strong flow of foreign direct investment and foreign portfolio investment. FPI inflows in FY21 amounted to over $35 billion.
Since March 23, the rupee has been depreciating amid concerns over Covid and the RBI policy announcement. Many currency traders and analysts argue that Wednesday sharp, abrupt fall cannot be a “false signal”; they expect the rupee to head back to levels of 77-78 over the next few months.
Nitesh Sharma, founder and director of Routeforex Solutions Pvt Ltd said, “Rupee is expected to depreciate gradually to levels of 76.5 to 77 in three to four months as rising Covid numbers have dampened market sentiment and it has also been impacted by RBI’s programme to buy government securities worth Rs 1 lakh crore this quarter.”
The newly announced programme, called G-SAP, is being read as a sort of quantitative easing policy in which the RBI tries to support the government’s elevated borrowing programme through infusion of liquidity. This, along with a rising dollar, is creating grounds for the rupee to depreciate further.
“Amid the Covid scare and inflation inching up, the RBI has taken a very liberal view and assured an accommodative stance and is looking to keep the yields stable even as they are inching up in the US. While I see the rupee (stabilising) around levels of 74-74.5 against the dollar, the weakness in the rupee will be determined by strength in the dollar which is gaining… It will also depend upon bond yields in US, inflow of dollars and how FDI behaves amid the pandemic affect,” said Madan Sabnavis, chief economist at Care Ratings.
The dollar, which was trading at 1.233 to a euro in early January 2021, is currently trading at 1.186 to a euro, a gain of 3.8%. Since March 1, the dollar has gained close to 1.6% against the euro.
Sugandha Sachdeva, vice president–commodity and currency research at Religare Broking, said Covid-19 trends have created an atmosphere of lingering uncertainty, posing risks to an already fragile state of recovery. “Besides, the RBI has maintained status-quo on policy rates for the fifth consecutive meeting, amid the pressures arising from the second wave of the virus which are likely to crimp demand and hurt domestic currency… (The rupee) looks poised to witness further depreciation in the coming days, even as sustained portfolio inflows are still underpinning the local unit,” Sachdeva said.
Will the RBI intervene?
The general feeling among experts is that the RBI may not intervene if the depreciation is gradual, but may do so if there is a big volatility. “Since we think that exports will rise, RBI will be comfortable with any depreciation and would not step in. While they may step in for high volatility, they would not step in for a gradual decline,” said Sabnavis.
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How can the rupee depreciation impact you?
Depreciation in the rupee impacts all expenditure in dollar terms— imports, foreign education, travel, investments abroad, medical treatment etc. On the other hand, if you are an exporter or an NRI sending money back home, depreciation would fetch you more rupees per dollar.
EDUCATION ABROAD: Suppose your daughter plans to go for a higher education in the US for a course with an annual fee of US$ 50,000. A 5% depreciation in the rupee from 72.5 to 76.125 would raise your cost for one year from Rs 36.26 lakh to Rs 38.06 lakh— a jump of Rs 1.8 lakh — while a 10% depreciation would raise a year’s fee to Rs 39.87 lakh. Besides the fee, the cost of living too will be higher with the rupee depreciation.
In 2019-20, resident Indians remitted $4.99 billion, under the liberalised remittance scheme, for the purpose of study abroad, besides $6.95 billion for travel. The total remittance under LRS for the year 2019-20 amounted to $18.76 billion — 17 times the remittance of $1.09 billion in 2013-14.
FUEL COST: A depreciating rupee increases the cost of crude import, which accounts for almost 20% of India’s imports. A rise in cost of crude raises fuel prices and inflation. That, in turn, leads to a rise in interest rates, which increases our borrowing cost.
What should you do?
Experts say individuals should cover for volatility risk for their planned expenditures in foreign currency. And there are several ways to do it.
For individuals sending their children abroad for studies in 5-10 years, they can start investing in international funds that invest in global markets through feeder funds or fund of funds. While an Indian investors invest in rupees in the fund of funds offered by fund houses in India, the money gets invested in dollar terms at the current exchange rate in a global fund. Even if the rupee depreciates from 74 to 85 in five years, this fund will fully protect the education cost against the currency depreciation risk.
On the other hand, if one has to make a significant expenditure in foreign currency in 4-5 months, he or she has more than one option. “Create a deposit account in the US and transfer the fund abroad. Or, go for a currency hedge in the exchange and that will cover you against the currency volatility,” Sharma said.
How will the hedge work?
Suppose you have to make a $50,000 payment in the US in July, and you think the rupee is going to depreciate from 74 now to 77 in July. Here is how you can hedge yourself against that risk.
* As of today your cost at 74 to a dollar would be Rs 37 lakh.
* If you buy a future contract worth $50,000, maturing in July at the rate of 74.5, you pay Rs 37.25 lakh.
* If in December, rupee depreciates to $77, you can square off and earn a profit of Rs 1.25 lakh.
* Now, when you make the payment of $50,000 in US, you will pay at the rate of 77 to a dollar, but your net outgo would be Rs 37.25 lakh as you had hedged the movement from 74.5 to 77.
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