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How Does Rupee Depreciation Impact The Logistics Sector?

Introduction

The Indian Rupee depreciation has been the worst in the past 4 years, with over 6% depreciation against the U.S. Dollar since January 2022. Usually, depreciation signals a smile for exporters, remittance receivers and those earning in dollars, and a frown for importers. However, the present circumstances are not advantageous for exporters and rupee depreciation impact the logistics sector also. What does this overall scenario spell for the Indian logistics sector and is there a ray of hope in the months to come? Let’s find out. 

Why Is The Rupee Falling?

A demand-supply equation determines the value of the Indian Rupee to the US Dollar. A high dollar demand weakens the rupee and vice versa. The following factors have been playing a role in this year’s rupee depreciation.

  • The Ukraine-Russia war
  • Lockdown in China
  • High commodity prices
  • Global supply chain issues
  • Widening trade deficit due to India’s higher import volumes
  • A strong dollar overseas
  • Heavy foreign capital outflows due to the sale of shares worth $28.4 billion by foreign institutional investors (FIIs)
  • Hike in interest rates by the US Federal Reserve

How Is The Rupee Depreciation Impacting Logistics?

A weak rupee depreciation impacts all the key stakeholders of the logistics sector in India. 

A] Importers

International importers make payments in US Dollars. When the value of the rupee drops, they end up paying more for the same volume of shipments, thus taking a hit on their profits. The rising cost of imported goods discourages imports, thus spiking the cost of domestic production and domestically-produced goods.

Most importers are compelled to explore alternative methods or instruments to keep their trade going. The conditions in China, the USA, the UK, Vietnam, Sri Lanka, North Korea, Russia and Ukraine are upsetting the forex, spreading uncertainty, and lowering the global trade sentiment, thus affecting imports.

B] Manufacturers and suppliers

The rupee depreciation impact the logistics sector by increasing the cost of production and services for domestic manufacturing and distribution companies. Eventually, this pattern increases inflation further.

C] Logistics service providers (LSPs)

Inflation spells higher fuel costs, resulting in higher operational costs for cargo transporters. Moreover, in scenarios where LSPs are under a long-term contract that permits charge revisions only once in a year or once in 6 months, they are compelled to bear the high operational costs, thus lowering their profit margins or even entering into losses. 

D] Exporters

For an exporter, it usually takes 30-50 days to execute an order. The rupee-dollar exchange rate fluctuates between the signing of the business deal and the export of goods. This fluctuation also increases the cost of raw materials that are to be imported. 

Moreover, nearly all currencies (including the pound and the euro) have depreciated against the US Dollar. The US Federal Reserve has stepped in to combat inflation by hiking its interest rates. This move has boosted the US currency but it has put brakes on economic recovery around the world. As countries trade in dollars, the hike in interest rates has diminished their purchasing power. All companies engaged in international trade are facing heat due to the strengthening of the dollar. Indian exporters are at the same level as exporters overseas. In the lack of any competition for exporters, the current surge in the dollar is not benefiting exporters.  

India imports nearly 80% of its crude oil requirement. The increase in oil prices translates down to the operational costs for domestic cargo transporters and other sectors, such as aviation and shipping. The price of aviation fuel and Heavy Fuel Oil (used in ships) increases thus affecting freight services. Exporters end up bearing high freight costs, thus taking a dip in their profit margins. 

Moreover, hikes in oil prices depress the production and supply of goods in general. This upsets the demand-supply ratio and increases inflation. Eventually, the common citizens face the brunt. To compensate for the increasing oil price hike, they exert tight control over purchases. When people spend less on goods and services, the economy slows down.

Winning DomainsLosing Domains

Information Technology

Pharma

Garments

Tea

Auto manufacturers

Oil and gas

Renewable energy

Auto component importers

Steel

FMCG

Consumer electronics

Aviation

Telecom services

To Sum Up

There is an expectation of further depreciation, resulting in a further FII sell-off. The Reserve Bank of India is taking action to stall the fall. In May, it used India’s forex reserves to prevent the rupee from reaching the ₹77.5 level against the US Dollar. It is prepared to spend another $100 billion, to defend the rupee, if needed. 

The current rupee depreciation is a matter of concern and not a crisis as serious as Sri Lanka’s. While a positive picture can’t be expected immediately, the government and industry are taking measures to minimise the ramifications on multiple sectors, including logistics and find ways to emerge out of the gloom.

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