Rupee Depreciation: Who Wins and Who Losses?

Rupee Depreciation- Who Wins and Who Losses

Amid the macroeconomic uncertainties around the world, the Indian National Rupee (INR) depreciated to an all-time low of 81.93/$ on October 4, 2022. The INR traded at 74.31/$ precisely a year ago, thus depreciating by 10% in a year. Let’s understand the impact of the rupee depreciation on the various sectors of the Indian economy.

The Winning Sectors

IT Sector:

The IT sector is the biggest beneficiary of the INR depreciation versus the dollar as clients of these companies are billed in dollars, and the US accounts for 50-60% of revenues for this sector. A 1% fall in the rupee against the dollar leads to a 30 basis point operating margin expansion for IT companies.

Garments Sector:

As exports to the US form a sizeable chunk, this sector is a gainer due to the INR depreciation. For every 1% depreciation in the rupee, profits for garment exporters increase by 0.25-0.5%.

Tea Exports:

India exports 230 million kg of tea, or around 16% of its annual production, to countries like the US, the UK, Russia, Iran, Japan, and Poland. Margins from tea exports are expected to rise by 2-3% due to currency depreciation.

The Losing Sectors

Oil and Gas Sector:

As India imports 85% of its oil requirements and half of its gas needs, the sector is the most negatively affected. Margins of oil importers will be negatively affected if higher costs due to depreciation are not passed to consumers.

Renewable Energy Sector:

Currently, Indian solar plants depend heavily on imported solar cells and modules. Every 1 rupee fall versus the dollar leads to a 2paisa/unit increase in tariffs. Projects may become unviable due to increasing costs.

Aviation Sector:

Jet fuel prices, lease payments, aircraft purchases, and maintenance costs are priced in dollars, increasing costs after adjusting for rupee depreciation. This will lead to an impact on profits and squeeze cash balances.

A simple crux is that net exporters gain when the rupee weakens against the dollar due to higher realisation in rupee terms. In contrast, net importers lose due to higher costs in rupee terms, provided that both these parties have not already hedged their currency exposures!

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