India Inc presses panic button on sagging rupee, economy

Source: Business Standard

Indian companies gearing up for new ‘normal’ for rupee.

With rupee ending at an all-time low of 63.13 a dollar, chief executive officers (CEOs) of top Indian companies are redrawing their currency risk strategies as a “new normal” for the rupee is fast emerging.

Some of the top companies such as Reliance Industries, Birlas, Essar, Adani group, and the Tatas have huge exposure in foreign currency and any change in the rupee’s value increases their costs of operations in a big way.

“I am disappointed, not surprised, with the way the rupee is falling,” says Rahul Bajaj, chairman of Bajaj Auto and one of corporate India’s vocal voices. “We are paying for the last four years of inaction and absence of reforms. The government has spent a lot of money in loan waivers, NREGA (employment guarantee scheme) and Food Security Bill and all these populist measures have now added to the deficit. We are not opposing pro-poor moves. We are against populist measures. We should be treating the disease and not the symptom. Now is the time to change policies.”

Mahindra & Mahindra chairman Anand Mahindra recently said the rupee is falling without a parachute and capital controls announced by the Reserve Bank of India (RBI) is just taking India back to the 1980s. The mood in the corporate camp is sombre. This is in spite of leading CEOs’ many suggestions to the Prime Minister during their meeting on July 29 on how to ring-fence the rupee. However, since then, the rupee has been continuing its downward journey.

Other CEOs say the economic slowdown and lack of initiatives by the United Progressive Alliance (UPA) government is unprecedented which is taking the country on the road to a complete shutdown. “There are no takers for infrastructure projects, and no growth in order book due to land acquisition problems, environmental clearance and corruption. This is perhaps one of the worst times for Indian companies to do business in India,” said the CEO of an infrastructure company asking not to be named.

RBI has already acted aggressively, tightening liquidity and raising interest rates, banning companies and individuals from spending money abroad in an attempt to stem the ongoing rupee weakening. RBI’s surprise tightening has been stark, but similar to that in early-1998, soon after the Asian crisis. This time, however, CEOs say that none of these measures is helping the rupee stop its slide against the dollar.

Bajaj says the government should change its policies instead of trying to manage the Indian currency. CEOs such as S Gopalakrishnan, executive vice-chairman of Infosys, say it would have been more appropriate to initiate policies that prevent an influx of non-essential imports such as coal and iron ore, and augment forex inflows by encouraging foreign direct investments. For this, a conducive and stable policy regime is needed, they add. Foreign institutional investments should also be liberalised by removing short-term capital gains tax.

According to the CEOs, another worrying factor is that oil prices are going up while the rupee is falling. With Brent crude at around $110 a barrel, its impact on inflation and Indian economy is still not being taking into account.

Under the World Trade Organisation rules, India can always impose a higher import duty on expensive, foreign-made cars and this is the right time to take action. “This was something the Prime Minister was made aware of on June 29. Importing coal into India when Coal India is sitting on massive reserves is a shame, they say. The government should immediately take action to part privatise Coal India so that all those power plants, which have shut down due to lack of coal can be revived,” said a CEO.

For many companies including the Adanis, Lanco and Reliance Power, the falling currency has been a double whammy. Many companies had taken massive loans from abroad without taking a forward cover.

They are also importing raw materials from overseas. With the surprise fall in the rupee, many companies are staring at the prospect of a default. “This is like the replay of the 2008-09 crisis. The only difference is that this time the government is groping in the dark and has no clue how to stop the slide,” said the CEO quoted above.

Analysts say sectors such as chemicals, paper, auto ancillaries, power and steel are the most affected from rupee depreciation. Among these sectors, mid-sized companies with exposure to forex risk but limited expertise or intention to hedge might be the most adversely affected.

CEOs say in the coming days, the government could look at the option of increasing import duty on select commodities, such as electronic goods, to reduce the import bill. The electronic goods import bill was $31.5 billion in FY13 (ended March 2013).

A similar 150 per cent import duty on expensive cars may also be considered. A sharper hike in diesel prices, although politically difficult, would also curb the oil import bill, which stood at $169 billion in FY13.