Rupee Exchange Depreciation: Impact Analysis

Rupee exchange DepReciation: impact analysis
January 2012

The Associated Chambers of Commerce and Industry of India
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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 cost of imports have increased by Rs. 65999 crore. • Oil Imports in rupee terms have gone up by Rs. 5676.7 crore,eventhough Globalpricesoilhascomedownandasaresultthedollarcostofimports havecomedown. • Theimpact of rupee depreciation on Crude Oil importssuggests:  Dollar price of Crude Oil have declined while exchange rate was depreciating.  Due to depreciation of currency, domestic price of crude oil has become more costlier.  Expenditureonpowerandfuelforindustryhasincreased.  The importers have to pay an additional Rs. 489.8 per barrel to import the same quantity of Crude Oil. • Theimpact of rupee depreciation on Thermal Coal importssuggests:  The benefit of falling commodity prices is not being transferred to the industryduetorupeedepreciation.  Rupee depreciation coupled with an inflexible tariff structure means that the power companies will have to suffer huge losses.  The importer has to pay an additional Rs. 684.6 per tonne toimport thesamequantityofcoal. • Theimpact of rupee depreciation on Fertilizer importssuggests:  TherehasbeenanincreaseintheglobalpricesofDAPfertilizer.

Rupee Exchange Depreciation: Impact Analysis

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 Thedepreciationofrupeehasfurtheraggravatedthecostpressureson theindustry.  Continuous increase in the prices of imported fertilizer can also adversely impact the subsidy burden of the government.  The combined effect of a depreciating rupee and an increase in dollar prices has meant that the importer has to pay an additional Rs. 3658.3 per mt. • Theimpact of rupee depreciation on Vegetable oil imports suggests:  Global prices have declined by $ 157.6 per metric tonne.  However,importcostindomestic currency has increased by Rs 6941.6 metric tonne.  Increase in import cost of palm oilincreasesthecostofproductionfor theFMCG industryandputs pressure on their profit margin. • Thesedevelopmentshavemajorimplicationsforindustryandconsumersas itpushesupinflation.

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Rupee Exchange Depreciation: Impact Analysis

IntroductIon
herupeehasdepreciatedbymorethan18percentsinceMay2011,moreoverwith the rupee breaching the 53 dollar mark, profit margins of companies that import commoditiesorcomponentswouldcomeunderseverepressure,whichcouldresultin priceincreasesfortheconsumer. Therupeedepreciationwillparticularlyhittheindustrialsectorandputhigherpressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediateproductsallaregettingaffected. Although the prices of most of the imported commodities have fallen, the depreciating rupeehasmeantthattheimportergetsnorespiteastheyneedtopaymoretopurchase thesamequantityofrawmaterials. Thedepreciatingrupeewouldkeepthepriceofimportedcommoditieselevated.Thusthe industrialsectorisboundtogetadverselyhit.

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Impact of Rupee Depreciation
Primarily the consequences of weak rupee are to be felt through:

A. Increase in the Import Bill
A depreciation of the local currency results in higher import costs for the country. 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.

B. Higher Inflation
Increase in...