‘The depreciation of the rupee is a pointer to the imbalance in the countries’

The rupee has depreciated against the US$ by almost 20 per cent in the past one year, about 11 per cent in the past 30 days and about four per cent in the past one week. That in essence sums up the ‘unsteady’ decline of the rupee in the recent past. The $ Index (which measures the performance of the $ against a basket of currencies) has appreciated by about 2 per cent in the past one year, reflecting movement of trade/capital to the $. The depreciation of the rupee is a pointer to the imbalance in the countries. Balance of Payments (BOP) and market sentiments being in favour of the $ for various reasons. As per the 2011-12 annual report of the Department of Pharmaceuticals, Ministry of Chemical & Fertilizers, Government of India, the Indian pharma sector generates about 40 per cent of its sales from exports. Therefore, a sharp depreciation of the rupee positively impacts the sector.

However, as per the same report, imports account for 38 per cent of the cost of raw materials of the pharma sector.

This, to an extent, checks the higher margins on account of rupee depreciation. Therefore, a 20 per cent rupee depreciation will have a net positive impact of about 8 per cent on the gross margins of the sector, assuming raw material accounts for about 63 per cent of sales. However, the impact of the movement in the rupee will vary across companies depending on their individual hedging policies, net exports and foreign currency borrowings. Given the one way slide of the rupee, it is tempting for a net exporter to leave currency positions open. However, companies, (especially large listed companies) look at managing their forex positions by borrowing in foreign currency at lower interest costs, selling or buying currencies in the forward or the futures market or perhaps buying put or call options so as to provide a stable earnings visibility to investors. Small and medium sized companies generally lack the expertise to dabble in the forex markets and given their smaller transaction sizes, options too are limited. These companies can perhaps look at covering a part of their net positions over a period of time with forward covers or adding cheaper foreign currency loans with the objective of reducing fluctuations in their earnings.

A related concern in the near term may be a general slowdown in overall business as currencies across the globe grapple with falling growth rates and a rising dollar.

– Susheel Koul, Director, Enaltec Labs