Earlier this week, the rupee weakened to a fresh 13-month low by falling 27 paise to 66.65 against the dollar. Today morning, it slipped further to 66.80 in the opening trade at the Interbank Foreign Exchange market. But experts say that the worst is yet to come, predicting it to breach the 68 mark against the dollar. After all, it has already depreciated 5 per cent this year.
"Rs 68/USD [dollar] is a fair possibility. The weakness that set in following fears of a trade war has now been accentuated by USD's strength ahead of FOMC rate decision," Anand James, chief market strategist at Geojit Financial Services, told Moneycontrol.
Kotak Mahindra Bank Ltd reportedly went a step further to say that the rupee could fall past its 2016 record low of 68.89 per dollar if global and local risks play out.
Why is the rupee depreciating?
To begin with, according to industry insiders, rising crude is putting pressure on rupee already stressed by widening fiscal deficit. "Crude is trading up approximately 33 per cent on a year-on-year basis and approximately 13 per cent on a year-to-date basis. India being a major importer of crude, the country's oil import bill is likely to increase 20 per cent to $105 billion this financial year from $88 billion in FY18, as per estimates by the petroleum and natural gas ministry," Hemang Jani, Head - Advisory, Sharekhan by BNP Paribas, told the portal. This can disrupt the fiscal position. India's current-account deficit, which already widened to $13.5 billion in Q3 FY18, up 87 per cent over the previous quarter, is forecast to hit its highest level in six years in this fiscal.
According to Kotak Securities, the value of a free currency like rupee depends on its demand in the currency market, which is why it depends to a great extent on the current account deficit. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A rise in oil prices is, hence, bad for the rupee.
Continued selling of local equity and debt by jittery foreign institutional investors, and a weak stock market further weighed on the rupee. The dollar, on the other hand, held near a 3-1/2-month high against a basket of currencies on Friday as higher U.S. yields have prompted unwinding of big short positions in the currency. According to Reuters, the dollar's index against six major currencies hit a high of 91.639, the strongest since mid-January, as investors warmed to the greenback. All thanks to attractive Treasury yields - the benchmark 10-year U.S. Treasuries have crossed the psychologically important 3 per cent mark.
What does this mean for India Inc?
According to the portal, the depreciating rupee will be a boon for export-focussed companies. So information technology and pharmaceutical companies with a large exposure to the US stand to benefit the most. Think companies like Infosys, TCS, HCL Technologies, Sun Pharma, Lupin, Natco Pharma and Aurobindo Pharma.
On the flip side, a weaker rupee could spell trouble for companies that have a higher amount of dollar-denominated debt on their books. The same holds true for capital-intensive sectors, firms with foreign currency borrowings and those who import raw materials heavily.
So oil marketing companies like Hindustan Petroleum Corporation and Indian Oil Corporation, power and telecom companies, automobile firms and capital goods companies are expected to bear the brunt of a weak rupee. The steel and mining sector as well as fertilisers, consumer durables and textiles may be impacted too.
Experts also point out that rupee depreciation will weigh on margins for most sectors of India Inc, which is already reeling under the pressure of slowdown in demand globally.