Borrowing costs

Rupee weakness will raise corporate borrowing costs, economists say

A weak rupee will drive up the costs of external borrowing as well as hedging for domestic companies. This may not boost exports significantly, given recession fears in key markets, but it will continue to inflate the import bill, leading to a rising current account deficit (CAD), economists have said. .

Once the psychological barrier of 80 to the dollar is breached, the national currency could fall further, some said. Rising imported prices for raw inputs like coal will drive up electricity costs, while high rates of imported fertilizers will inflate the government subsidy bill.

However, they also indicated that some depreciation of the rupee is warranted for India to retain its export competitiveness, as the currencies of the country’s competitors have also weakened against the dollar.

Pronab Sen, a renowned economist and former chairman of the National Statistics Commission, warned against aggressive intervention to defend the rupee. “This is because such a defense tends to heighten the expectations of foreign portfolio investors that the Indian currency will depreciate in the future once interventions are minimized. This could then be counterproductive.

The RBI said that while it is not targeting any particular level to rein in the rupee, it will ensure there is no “jerkiness”.

“It seems like the right approach at the moment,” Sen said.

Bank of Baroda Chief Economist Madan Sabnavis said once the rupee hits 80 against the dollar it will mean “there will be further depreciation as the market will assume that the RBI is d agreement with this movement”. “Forex risk perception will increase due to this wild depreciation. This will make foreign borrowing less attractive when combined with higher interest rates overseas,” Sabnavis said.

Pressure on foreign exchange reserves will be unrelenting as the RBI continues to intervene and revaluation takes place with the dollar appreciating against all currencies, he added.

Yes Bank’s chief economist, Indranil Pan, said: “Although exports will not increase significantly, imports will become more expensive. Exports may not increase because, for a country like India, exports are driven more by global growth than by the exchange rate. This will mean that reducing the current account deficit through an increase in exports may not occur.

Companies wishing to raise funds abroad will become more cautious and will have to hedge their currency exposure. “External commercial borrowings that will be repaid will cause problems for borrowers if they have not hedged against currency risks,” Pan said.

Aditi Nayar, chief economist at Icra, said: “Amid the rebound in crude oil prices and the expectation that the dollar will remain relatively strong for the time being, we expect the rupiah to weaken to 81/ dollar to T2FY23.”

“Going forward, global sentiment and the direction of REIT flows will determine whether the INR continues to depreciate in the remainder of the year, or if US recession fears eventually halt dollar strength,” said Nayar.

She added that some depreciation of the rupee is needed to protect export competitiveness, as many emerging market currencies have reported deeper depreciation against the dollar, compared to the rupee this year.

DK Pant, Chief Economist at India Ratings, said: “India is a net importer of commodities. While exports will be boosted, however, the upside will be limited due to slowing growth/recession in the developed world. A weaker rupee will push up inflation and the current account. In a scenario of continued capital flight, the currency will tend to weaken further.