IMPACT OF RUPEE DEPRECIATION ON SMEs IN INDIA

By BWA Envoy
May 19, 2022
2 Minutes Read

Currency depreciation is a fall in the value of a currency in a floating exchange rate system. The Indian rupee fell to an all-time low of 77.44 against the U.S. Dollar. INR has emerged as one of the worst-performing Asian currencies, followed by the Korean won and Philippine peso, each of which has declined around 1.6 per cent. The rupee has shed almost 3.5% against the US dollar this year and 3.2% since Russia's military operations in Ukraine on February 24. Every time the Indian currency depreciates against any foreign currency, it has more negative impacts than positive ones since we are a net importer country.

Positives - A weaker rupee should give a boost to exports, but in an environment of uncertainty and weak global demand, a fall in the external value of the rupee may not translate into higher exports.

Negatives - There is a risk of increasing inflation, and it will be difficult for the central bank to maintain interest rates at a record low for longer. India is one of the top importers of edible oil, and a weaker currency will further escalate edible oil prices and lead to higher food inflation. The current account deficit has already widened with depleting foreign exchange reserves.

Impact on SMEs:

Fluctuations in the exchange rate affect different stakeholders differently. Generally, when the rupee appreciates, importers benefit, and exporters are adversely affected and vice-versa. However, the impact varies from sector to sector. Industries like textile where the dependence on imported raw materials is limited could benefit more from the rupee depreciation. A weaker rupee would also make imports more expensive for Indian consumers, making homegrown products relatively cheaper. It could work in favour of certain domestic companies that face stiff competition from cheaper imports.

India is likely to exceed its export target of $400 billion for 2021-22 with a 50% share coming from SMEs. Indian exporters of carpets, handicrafts, and engineering goods expect up to 10% benefit from the ongoing rupee depreciation.

Funding constraints on SMEs:

With over 95 per cent of India’s businesses falling in the SME and MSME category, banks and lending agencies are finding it increasingly difficult to provide credit to this sector. Every 5% fall in the rupee adds about 10-15 bps to inflation. Retail inflation in March neared the 7% mark, largely reflecting the impact of geopolitical spill overs. The interest rate hike by RBI will make the credit availability for SMEs costlier, directly affecting the cash flows. The conventional approach to funding SMEs/MSMEs has been through the traditional route of overdraft facilities, bank loans, and enhanced Line of Credit.

However, the budget of 2022 delved deeply into these alternative financing instruments, like emergency credit line schemes to 5 lakh crore, a revamped CGTMC with direct infusion of funds that can help small and medium-sized companies kick-start their businesses and, create a growth momentum with positive market sentiment.