Analysis: If rupee slump persists, it can hurt India's Modi

GVK Power & Infrastructure

16/08/2018 11:13

* Rupee hits all-time low of 70.40 against dollar
    * Rupee down 9.2 pct this year, raising import bill
    * Inflation could rise because of costlier imports

    By Manoj Kumar, Suvashree Choudhury and Neha Dasgupta
    NEW DELHI/MUMBAI, Aug 16 (Reuters) - The rupee's plunge to a
record low has worried a wide cross-section of India's society:
companies, importers, those going on vacation and students
planning to study overseas. But if the weakness persists, Prime
Minister Narendra Modi's job could become a lot harder just
before big state and national elections.
    India is a big buyer of everything from crude oil and
electronics to gold and edible oil, and its import bill was
expected to cross $600 billion in the fiscal year ending in
March 2019, from about $565 billion in the previous year.
    The 9.3 percent fall in the rupee  INR=D2  this year has
already led to a surge in local prices of goods with an imported
component. July was the ninth straight month in which India's
inflation was higher than the central bank's medium-term target
of 4 percent.  urn:newsml:reuters.com:*:nL4N1V44G8
    The currency fell to a fresh low of 70.40 to the dollar on
Thursday.  urn:newsml:reuters.com:*:nL4N1V44G8
    "The sharp rupee depreciation has come as a shock for us,"
said Kamal Singh, 50, a senior government official in Delhi
visiting family in the United States. "Now I will have to spend
at least 10,000 rupees ($143) more on travel."
    Modi's Bharatiya Janata Party (BJP) considers urban
middle-class Indians a key voting bloc, the segment most
affected by the rupee depreciation. The opposition Congress
party has blamed the government's policies for the rupee slump
and called it an indication of weakness in the economy.
    Most political analysts agree that Modi does not yet face a
significant challenge, but believe he will be hard put to repeat
the BJP's sweep of the 2014 general election.
    Besides the next general election due by May, three big
BJP-ruled states in India's heavily populated northern plains go
to the polls over the next four months.
    Satish Misra, senior fellow at the Observer Research
Foundation in New Delhi, said although the rupee slide was a
result of several factors, it was affecting the image of the
Modi government.
    "As prices shoot up and products become costlier, the middle
class will begin to get angry," Misra told Reuters. "Since the
middle class is the opinion maker, the BJP will suffer
electorally."
    The government has said the depreciation is due to the
economic woes in Turkey that has dragged down currencies of 
emerging market countries around the world.
    "Recent developments relating to Turkey have generated
global risk aversion towards emerging market currencies and the
strengthening of the dollar," said senior cabinet minister Arun
Jaitley.
    "However, India's macro fundamentals remain resilient and
strong. Developments are being monitored closely to address any
situation that may arise in the context of the unsettled
international environment."
    The rupee fall, however, benefits exporters such as software
companies.
    The Thomson Reuters India IT Services & Consulting share
index, which includes top Indian firms such as Infosys
 INFY.NS , Tata Consultancy Services  TCS.NS , Wipro  WIPR.NS 
and HCL Technologies Ltd  HCLT.NS , has risen about 31 percent
this year.
        
    CORPORATE HIT
    Indian companies which have raised funds overseas are
worried about the rise in servicing costs. The country's
external debt rose to $530 billion at the end of March, out of
which nearly 42 percent constituted debt maturing by March 31.
    Several companies have said the rupee's slide will hit their
margins.
    New Delhi-based Jindal Stainless (Hisar) Ltd  JINA.NS  said
that as it is a net importer of raw materials, the sharp rupee
depreciation would badly hurt the company, which has been
lobbying to reduce an import tariff on steel scrap.
    "With the depreciating currency, this problem gets further
aggravated," Managing Director Abhyuday Jindal told Reuters. 
    Other companies such as JSW Steels Ltd  JSTL.NS  and the GVK
Group - which has business interests in energy, resources,
airports, transportation and hospitality - are also bracing for
higher input costs, which if not passed on to customers, would
hit profitability.
    "Inherently if you look at it, inflation is at a rate of 4.5
percent per year, so we cannot expect the rupee to be stable,"
said Seshagiri Rao, joint managing director of JSW, which is a
heavy importer of high-quality coal.
    "Everybody is expecting (some) rupee depreciation, but it's
(happening) too fast."
    To temper the inflation and arrest the rupee slide, the
Reserve Bank of India has raised interest rates by a total of 50
basis points in two consecutive policy meetings since April, the
latest one on Aug. 1. It has also spent around $23 billion
selling dollars since April. 
    If the rupee stays around current levels, the government
might have to consider cutting taxes on petroleum products to
soothe customer anger at higher pump prices, said a finance
ministry official, who spoke on condition of anonymity.
    N.R. Bhanumurthy, an economist at the National Institute of
Public Finance and Policy think-tank, partly funded by the
finance ministry, said a further rate hike was likely, which
would take a toll on growth.
    The government had forecast the economy would grow by 7.5
percent this fiscal year, one of the biggest expansions by a
major economy in the world, after a 6.7 percent rise a year
earlier.

 (Reporting by Suvashree Choudhury, Manoj Kumar, Neha Dasgupta,
Nidhi Verma and Swati Bhat; Editing by Krishna N. Das and Raju
Gopalakrishnan)
 ((suvashree.dchoudhury@thomsonreuters.com; +91-22-61807223;
Reuters Messaging:
suvashree.dchoudhury.thomsonreuters.com@reuters.net))