Due to low demand, some firms do not have the pricing power to pass costs to customers
The depreciating rupee, which hit a record low on Wednesday, may impact companies’ profits, particularly of those using imported material. This is because in the current scenario of low demand, these do not have the pricing power to pass costs on to customers. This would harm the overall economic growth, say economists.
The falling rupee would also take away much of the benefits of declining international crude oil prices, though global prices had come down at a faster rate than the pace of the rupee’s depreciation against the dollar, economists said.
Though normally, exports should rise with a decline in the value of the rupee, this did not happen in the previous financial year, despite the rupee losing value against the dollar, since it faced declining demand in the US and Europe. The situation is not going to change much this financial year, too.
“The rising prices of imports, given the fact that India is net importer, would hit the corporate sector profitability. This would particularly be so since India largely imports intermediate and raw materials,” said Devendra Pant of Fitch Ratings, India.
Planning Commission Principal Advisor Pronab Sen said if prices of petroleum imports rose due to the depreciating rupee, it would surely add up to the cost pressure.
“Now, if the system permits, it could raise inflation or else the margins of companies will get squeezed. Squeezing of margins of companies in an already slowing economy will further hurt the overall growth story,” he said.
However, international oil prices of crude have so far been beneficial to India, even though the rupee has depreciated to a record low.
Moses Harding, head (global markets group), IndusInd Bank, said, “The current depreciation, in terms of lower crude oil prices, would not hit much. Although the rupee is down by about five per cent, the benefit in terms of lower subsidy due to falling global crude oil prices would be higher at about 10 per cent. It is not inflationary at this stage because the crude oil benefit is much sharper than the currency depreciation.”
International crude oil price for the Indian crude oil basket fell to $109.63/barrel as on May 8, against $112.55 a barrel on May 4. In this period, global crude price of Indian basket declined 2.59 per cent, while the rupee depreciated 0.61 per cent to 53.15 a dollar as on May 8, against 53.48 as on May 4. On Wednesday, the rupee fell to 53.82 a dollar.
| “The rupee may weaken further, but may not breach the psychological barrier of 54 to a dollar in the near term. It is a reflection of problems in Europe” N S Venkatesh Head (treasury), IDBI Bank |
| “Exporters would benefit from the rupee’s fall in the short term. But import costs of textile machinery will rise, thus raising project costs as well” Debashish Poddar CEO (textile division), Bombay Dyeing |
| “If the rupee continues to slide further, we would face serious problems, which would be reflected in the corporate performance or earnings over the next few quarters” Deven Choksey MD, KR Choksey Securities |
Source : BS
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