Rupee exchange DepReciation: impact analysis

January 2012

The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office: 1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498

Email: assocham@nic.in | Website: www.assocham.org

domestic price of crude oil has become more costlier.7 crore. 684.8 per barrel to import the same quantity of Crude Oil. • The impact of rupee depreciation on Fertilizer imports suggests:  There has been an increase in the global prices of DAP fertilizer. 5676.  Due to depreciation of currency. • The impact of rupee depreciation on Crude Oil imports suggests:  Dollar price of Crude Oil have declined while exchange rate was depreciating.  The importers have to pay an additional Rs. Rupee cost of imports have increased by Rs. even though Global prices oil has come down and as a result the dollar cost of imports have come down.  Expenditure on power and fuel for industry has increased.  Rupee depreciation coupled with an inflexible tariff structure means that the power companies will have to suffer huge losses. 65999 crore.  The importer has to pay an additional Rs. • Oil Imports in rupee terms have gone up by Rs.Executive Summary • The study assesses the impact of rupee depreciation on:  The import bill of the country  Key import commodities • Rupee depreciation has pushed rupee cost of imports. Rupee Exchange Depreciation: Impact Analysis 1 . 489.6 per tonne to import the same quantity of coal. • The impact of rupee depreciation on Thermal Coal imports suggests:  The benefit of falling commodity prices is not being transferred to the industry due to rupee depreciation.

6 per metric tonne. import cost in domestic currency has increased by Rs 6941.6 metric tonne.3 per mt.  However. 2 Rupee Exchange Depreciation: Impact Analysis .  Increase in import cost of palm oil increases the cost of production for the FMCG industry and puts pressure on their profit margin.  The combined effect of a depreciating rupee and an increase in dollar prices has meant that the importer has to pay an additional Rs. • These developments have major implications for industry and consumers as it pushes up inflation. 3658. The depreciation of rupee has further aggravated the cost pressures on the industry.  Continuous increase in the prices of imported fertilizer can also adversely impact the subsidy burden of the government. • The impact of rupee depreciation on Vegetable oil imports suggests:  Global prices have declined by $ 157.

pulses. Higher Inflation Increase in import prices of essential commodities such as crude oil. Thereby making it costlier for the consumers and hence inflation might be pushed up further. imported coal. C. Increase in the Import Bill A depreciation of the local currency results in higher import costs for the country. imported industrial intermediate products all are getting affected. Although the prices of most of the imported commodities have fallen. coal and other industrial raw materials are bound to increase the prices of the final goods. The depreciating rupee would keep the price of imported commodities elevated. the depreciating rupee has meant that the importer gets no respite as they need to pay more to purchase the same quantity of raw materials. Fiscal Slippage The central government fiscal burden might increase as the hike in the prices of imported crude oil and fertilizer might warrant for a higher subsidy provision to be made for these commodities. which could result in price increases for the consumer.IntroductIon he rupee has depreciated by more than 18 percent since May 2011. The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil. edible oils. fertilizer. profit margins of companies that import commodities or components would come under severe pressure. Rupee Exchange Depreciation: Impact Analysis 3 . metals and minerals. B. Failure of a similar rise being experienced in the prices of exportable commodities is going to result in a widening of current account deficit of the country. Thus the industrial sector is bound to get adversely hit. T Impact of Rupee Depreciation Primarily the consequences of weak rupee are to be felt through: A. moreover with the rupee breaching the 53 dollar mark.

Increase in Cost of Borrowings Interest rate differentials in domestic and global markets encourage the industry to raise money through foreign markets however a fall in the rupee value would negate the benefits of doing so.D. The next two sections of the study assess the impact of rupee depreciation on the: • • Import Bill of the Country Import of Key Commodities     Crude Oil Thermal Coal Fertilizer Vegetable Oil 4 Rupee Exchange Depreciation: Impact Analysis .

Impact on Import Bill • Table 1 looks at the import figures for India’s top ten import commodities.6 December 2011 190495.8) Source: ASSOCHAM’s calculation From the above table we can see that due to rupee depreciation import bills in the above two situations differ by Rs. • • A scenario analysis based on the data from the various tables indicated above suggests that: Alternative Scenario’s Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs.6 December 2011 226535. the import has increased.I. Therefore the rupee depreciation has made import of these commodities expensive. Table 3 has been tabulated based on the scenario that the exchange rates in August and December 2011 were same to the one prevalent in April 2011 (Appendix). Observation: From Table 1&2 we can see that in case of Petroleum crude & products (Appendix) • • Import bill of petroleum crude & product have declined in international currency in December as compared to April 2011. The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011 (Appendix).8 crore.2 Bill Note: Exchange rate during the April (44. Crore thereby taking into account the exchange rate prevailing for the corresponding months (Appendix). Rupee Exchange Depreciation: Impact Analysis 5 . 36039. However.0 Bill Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs. Crore ) April 2011 160536. in terms of domestic currency. Table 2 tabulates the value of top ten import commodities in Rs. Crore ) April 2011 160536.6 Increase in Import 65999.8 Increase in Import 29959.4) and December (52.

Thereby hitting their profit margins. Impact of Rupee depreciation A: Impact on Companies and Consumers • A depreciating rupee makes import of Crude oil more expensive which directly leads to an increase in the operating expense of the companies. Due to depreciation of currency domestic price of crude oil became more costly. Impact of Exchange rate on Different Commodities Crude Oil Fig: Crude Oil (in dollars) and Rupee Depreciation Source: IMF • • • Rupee was depreciating over the period of time.II. For the consumers. • 6 Rupee Exchange Depreciation: Impact Analysis . a constant rise in import prices of crude oil would mean an increase in petrol prices. Dollar price of Crude have declined while exchange rate was depreciating.

9 489.43 Exchange Rate 44.46 109. However.03 – 9.56 22. Please refer to table below: Table: Impact of Rupee Depreciation on Crude Oil Price Commodity Crude Oil (bb) April Nov Difference Source: ASSOCHAM’s calculation Price $ 118. the depreciation of rupee has meant that the importer has to pay an additional Rs.8 Rupee Exchange Depreciation: Impact Analysis 7 .7 8.76 Expenditure on Power and Fuel 15.8 bb to import the same quantity of Crude Oil.Please refer to table below: All Industry Expense in Q2 (Growth) Second Quarter 2010-11 2011-12 Operating Expenses 19.79 Source: CMIE B: Impact on importers • • The global prices of Crude Oil in November 2011 were lower than that in April 2011.4 52.1 5745.67 26. 489.3 Price Rs 5256.

9 Note: Exchange rate during the April (44.0 December Decrease in Import Bill 53294.7 crore when exchange rate was varying during the respective month. Crore) April 57700. However.7 Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs.C: Impact on Import bill of Crude Oil Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs.8) Source: ASSOCHAM’s calculation From the above table we can see that the impact of rupee depreciation on the import bill of crude oil. 4405. • • • 8 Rupee Exchange Depreciation: Impact Analysis . Import bill of crude oil decreased by Rs. Crore) April 57700.4) and December (52. in terms of domestic currency import costs of Crude oil have increased.0 December Increase in Import Bill 63376.7 5676. • Import bill of crude oil increased by Rs.1 4405. 5676. Import value in terms of international currency has declined in December as compared to April 2011.9 crore when exchange rate was fixed during the respective month.

industry and services.Thermal Coal Fig: Thermal Coal Price (in dollars) and Rupee Depreciation Source: IMF • • • • The prices of thermal coal in dollars term has been declining The Indian Rupee has been depreciating Import cost in terms of rupee has been rising The benefit of falling commodity prices is not being transferred to the industry due to rupee depreciation Impact of Rupee Depreciation on Thermal Coal A. Moreover. a fall witnessed in power generation capacity is likely to have an adverse affect on all the three sectors of the economy namely agriculture. Power Generating Companies A sharp decline in the value of the rupee is bound to affect the power generation capability of power plants that are heavily dependent upon imported coal for electricity generation. This would mean an increase in the level of energy deficit in the country. Rupee Exchange Depreciation: Impact Analysis 9 .

7 7.6 C. B.5 6.1 684.739. 684.2928. Due to rupee depreciation the import bills in the above two situation differ by Rs. Impact on importers • The global prices of thermal coal in November 2011 were lower than that in May 2011. Import Bill for Coal.4 crore. • • 10 Rupee Exchange Depreciation: Impact Analysis .Another dimension to the rupee depreciation episode is that not only has the expenditure on imports increased but this coupled with an inflexible tariff structure means that the power companies are going to suffer huge losses. Yet. the increase in import bill for coal. Using April 2011’s exchange rate to calculate the import bill for April 2011 and December 2011.7 Exchange Rate 45.1 crore.6 per tonne to import the same quantity of coal. the depreciation of rupee has meant that the importer has to pay an additional Rs. coke & briquettes comes out to be Rs. • Please refer to table below: Table: Impact of Rupee Depreciation on Thermal Coal Price Commodity Thermal Coal (tonne) May Nov Difference Source: ASSOCHAM’s Calculation Price $ 127. coke & briquettes • With the respective exchange rates for the months of April and December 2011. 1515. coke & briquettes would have been Rs. 4443.424. the increase in import bill for coal.6 121.0 52.3 crore.7 Price Rs 5.9 -5.

In addition the fear of a demand contraction as well as the competition prevailing is acting as a deterrent for the fertilizer companies from raising their prices. coke & briquettes Alternative Scenario’s Scenario 1: Import bill valuation using prevailing exchange rates for the respective months Month Value of Import (Rs.1 2928.3 9523. Crore) April 2011 5079.Please refer to table below: Table: Import Bill for Coal.4 Fertilizer A. Crore) April 2011 5079.8 December 2011 Increase in Import Bill ASSOCHAM’s calculation Scenario 2: Import bill valuation using April 2011exchange rates for the respective months Month Value of Import (Rs. In such a scenario the Indian fertilizer makers have been trying hard to renegotiate the rates with their suppliers so that they can abstain from passing on the price burden to the consumers. Impact on Industry With the Indian currency depreciating and an increase in the price of DAP (fertilizer) in international markets the import prices of fertilizer have increased and fertilizer makers have come under pressure. Expenses Rise • Net sales growth rate has declined in Q2 2011 as compared to the growth seen in Q1 2011.2 4443.8 December 2011 Increase in Import Bill 8008. A continuous increase in the prices of imported fertilizer can also adversely impact the subsidy burden of the government. • Rupee Exchange Depreciation: Impact Analysis 11 . Sales Drop. Growth in Expenses incurred on raw materials has risen in Q2 of 2011 as compared to Q1 2011.

The combined effect of a depreciation rupee and an increase in dollar prices of DAP fertilizer has meant that the importer has to pay an additional Rs.Please refer to the chart below: Chart: Net Sales and Expenses on Raw Materials. 2713. Q1 & Q2 2011 (Growth Rates) Source: CMIE B. Impact on Importer • An increase in the global prices of DAP fertilizer has been witnessed between the months of May 2011 to November 2011.3 per mt. The effect of rupee depreciation becomes more evident when we see that had the rupee stayed at May 2011’s level then the additional amount the importer would have to pay would have been Rs. 3658. 945 per mt. The depreciation of rupee has further aggravated the cost pressures on the fertilizer industry. • • • • 12 Rupee Exchange Depreciation: Impact Analysis .3 per mt to import the same quantity of coal. Therefore due to rupee depreciation the importers burden has increased by Rs.

Using April 2011’s exchange rate to calculate the import bill for April and December 2011.11568.3 3658. 13922. 2353.1crore. • • Rupee Exchange Depreciation: Impact Analysis 13 .7 crore.3 Table: Impact of Rupee Depreciation on DAP Fertilizer Price at May 2011 Exchange Rate Commodity May DAP (Fertilizer) October Difference Source: ASSOCHAM’s calculation Price $/mt 610 631 21 Exchange Rate 45 45 0. Impact on Import Bill for Fertilizer Manufactured • With the respective exchange rates for the months of April and December 2011.3 Price Rs/ mt 27450 31108. the increase in import bill for fertilizer manufactured would have been Rs. the increase in import bill for fertilizer manufactured comes out to be Rs.4 crore Due to rupee depreciation the import bills in the above two situations differ by Rs.3 4.0 Price Rs/ mt 27450 28395 945 C.Please refer to tables below: Table: Impact of Rupee Depreciation on DAP Fertilizer Price at prevailing Exchange Rates Commodity May DAP (Fertilizer) October Difference Source: ASSOCHAM’s calculation Price $/mt 610 631 21 Exchange Rate 45 49.

Source: IMF • • • Rupee was depreciating over the period of time.7 11568. Crore ) (Rs. Due to depreciation of currencies domestic price of Vegetable Oil has become more costly. Soybean Oil and Sunflower oil).3 12440.4 Source: ASSOCHAM’s Calculation Vegetable Oil Fig: Vegetable Oil (in dollars) and Rupee Depreciation Note: Vegetable Oil price have calculated on the basis of the average value of four sub-categories of vegetable oil international prices (Olive Oil.1 April 2011 December 2011 Increase in Import Bill 872.Please refer to table below: Import Bill for Fertilizer Manufactured Alternative Scenario’s Scenario 1: Import bill valuation using Scenario 2: Import bill valuation using prevailing exchange rates for the respective April 2011exchange rates for the respective months months Value of Import Value of Import Month Month (Rs. Dollar price of Vegetable Oil have declined while exchange rate was depreciating. 14 Rupee Exchange Depreciation: Impact Analysis . Crore ) April 2011 December 2011 Increase in Import Bill 872. Palm oil.3 14794.4 13922.

6 Exchange Rate 44.9 88149.08 2087.6 B.77 -138.37 52.3 Price Rs 81207.2 Exchange Rate 44. due to rupee depreciation the import cost in domestic currency has increased by Rs 6941.3 Price Rs 49862.37 52. • Please refer to table below: Table: Impact of Rupee Depreciation on Vegetable Oil Price Commodity April Vegetable Oil Nov (Metric Tonne) Difference Source: ASSOCHAM’s calculation Price $ 1830.70 8.56 51950.7 -157.4 6941.70 8.6 per metric tonne. However.79 985.517 Source: ASSOCHAM’s calculation Rupee Exchange Depreciation: Impact Analysis 15 . Industry Prospects Palm oil is used as a raw material in the FMCG industry for manufacturing soaps therefore increase in import cost of palm oil increases the cost of production and puts pressure on the profit margins of these companies.6 per metric tonne.2 1672. Vegetable Oil global prices have declined by $ 157.Impact of rupee depreciation A: Impact on Importer • The global prices of Vegetable Oil in November 2011 were lower than that in April 2011. Please refer to table below: Commodity Palm Oil (Metric Tonne) April Nov Difference Price $ 1123.

coke & briquettes Organic chemicals Iron & steel Fertilizer manufactured Metal ferrous ores & metal scrap Inorganic chemicals Total Imports Apr-11 57700.7 6746.5 4508.3 571.7 Aug-11 1248.2 73.4 9608.5 8529.4) and December (52.6 474.5 433.7 30157. Crore) Indicator Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal.7 160536.APPENDIx Table 1: India’s Top Ten Imports (US $ Crore) Indicator Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal.5 Source: CMIE *The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011 Table 2: India’s Import (Rs.3 Dec-11* 63376.5 5079.0 20807.1 5079.3 6536.5 180.2 21595.1 22639.7 3375.5 9523.1 179208.8 14794.2 3411.9 5074.9 19.2 28.5 25380.1 4290.6 111.2 52.5 1256.3 76.9 497.0 127.2 143.6 Aug-11 56827. coke & briquettes Organic chemicals Iron & steel Fertilizer manufactured Metal ferrous ores & metal scrap Inorganic chemicals Imports Apr-11 1299.3 12256.3 3615.6 211.8 280.8 4497.8) * The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011 16 Rupee Exchange Depreciation: Impact Analysis .2 6496.4 2847.2 53.5 468.6 Source: ASSOCHAM’s calculation Note: Exchange rate during the April (44.7 Dec-11* 1200.6 276.2 3938.1 114.8 3328.4 101.1 74.9 872.0 19245.7 99.2 480.4 123.6 2373.3 4405.7 226535.6 99.7 161.9 96.

8 4267.6 2373.3 6536.7 4399.7 160536.2 21595.5 9523.3 9376.7 2394.7 30157.8) *The import value for the month of December 2011 has been calculated using the rate of growth observed between the months April and August 2011.5 1256.8 14794.0 20807. HHH Rupee Exchange Depreciation: Impact Analysis 17 .8 Petroleum crude & products Capital goods Gold & silver Pearls precious & semiprecious stones Coal.1 5463.3 12256.1 179208.0 6378.7 21342.7 174875.0 19245.3 4405.7 7172.7 3294.7 226535.5 8529.5 8008.1 5079.2 3248.5 25380.8 4497.6 56827.Table 3: India’s Import bill at April 2011’s Exchange Rate (Rs Crore) Indicator April-11 August-11 December11* Aug-11 (At April Exchange Rate) 55453.1 4956.4 2847.4) and December (52.4 9608.1 22639.3 22091.2 2315.5 5079.0 25359.8 Dec-11 (At April Exchange Rate) 53294.3 63376.8 3328. coke & briquettes Organic chemicals Iron & steel Fertiliser manufactured Metal ferrous ores & metal scrap Inorganic chemicals Total Imports 57700.1 5673.4 12440.9 872.2 3411.2 6496.7 3375.6 ASSOCHAM’s Calculation Note: Exchange rate during the April (44.9 5074.8 21073.5 4508.4 190495.7 6746.

Sharjah. It has been especially acknowledged as a significant voice of Indian industry in the field of Corporate Social Responsibility. Telecom. ASSOCHAM has also signed MoU partnership with Business Chambers in more than 45 countries. Economic and International Affairs.assocham. Legal Reforms. ASSOCHAM has over 100 National Committees covering the entire gamut of economic activities in India. Infrastructure.About ASSOCHAM ASSOCHAM acknowledged as Knowledge Chamber of India has emerged as a forceful. 46536498 Email: assocham@nic.000 members which includes multinational companies. Energy & Power. Real Estate. New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82. Banking & Finance. Biotechnology. Community Centre. Corporate Governance. Education. UK and USA. effective and forward looking institution playing its role as a catalyst between the Government and Industry. India’s top corporates. ASSOCHAM established in 1920 and has been successful in influencing the Government in shaping India’s economic. The Associated Chambers of Commerce and Industry of India ASSOCHAM Corporate Office 1. Kailash Colony. Nanotechnology. ASSOCHAM renders its services to over 3. Tourism. Zamrudpur. Environment & Safety. The Chamber has its international offices in China. Information Technology. medium and small scale units and Associations representing all the sectors of Industry. Agriculture. Corporate Finance. Moscow.org . ASSOCHAM is also known as a Chamber of Chambers representing the interest of more than 350 Chambers & Trade Associations from all over India encompassing all sectors. Civil Aviation. pro-active. fiscal and social policies which will be of benefit to the trade and industry.50. trade.in | Website: www. Pharmaceuticals. Company Law. Rural Development etc.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer: Get 4 months of Scribd and The New York Times for just $1.87 per week!

Master Your Semester with a Special Offer from Scribd & The New York Times