Impact of Rupee Depreciation on Indian Corporates

The depreciation of the Indian rupee has led to significant financial challenges for Indian corporates engaged in foreign currency borrowings. This comes amid global economic uncertainties, including trade wars and a slowdown in growth.

Key Implications of Rupee Depreciation

• External Commercial Borrowings (ECBs):
  • There has been a 5% depreciation in the rupee since April 2024, leading to an equivalent increase in the debt repayment burden for companies with ECBs.
  • The RBI's approach indicates a tolerance for gradual rupee depreciation along with other currencies.
  • Interest rate differentials that once favored foreign borrowing have diminished due to the U.S. Federal Reserve's rate hikes and dollar appreciation.
• Hedging Practices:
  • Not all companies have hedged their foreign loans, exacerbating the cost impact of rupee depreciation.
  • Approximately 70% of ECBs raised in 2023-24 were hedged, but the remaining 30% face increased costs.
• Impact on Different Sectors:
  • Export-oriented sectors (e.g., IT, pharmaceuticals) benefit from a weaker rupee as their goods become more competitive globally.
  • Import-dependent sectors (e.g., oil and gas, electronics) suffer from increased input costs due to costlier imports.

Strategic Responses by Corporates

• Risk Management:
  • Companies are increasing hedge ratios despite higher costs to mitigate forex risks.
  • Some are shifting to domestic financing to reduce exposure to forex fluctuations.
  • Businesses are exploring advanced hedging instruments, such as options.
• Operational Adjustments:
  • Firms are focusing on improving operational efficiencies and cost-cutting measures.
  • Pricing strategies are being reassessed to pass increased costs to consumers where possible.

Macroeconomic Indicators

• The RBI has intervened in the forex market to control rupee volatility, resulting in a reduction of foreign exchange reserves by $51.52 billion.
• Since November 6, 2024, the rupee has depreciated by 3.2% against the US dollar.

In conclusion, while export-driven corporations may harness some advantages from the weaker rupee, import-reliant industries face mounting pressures. The broader corporate sector is increasingly adopting sophisticated hedging techniques and operational strategies to navigate the unpredictable currency landscape.