Rupee at 80: Signs of lower FY23 GDP and corporate sector growth

If history is any gauge, the recent depreciation in the value of rupee against the US dollar signals a slowdown in India’s growth cycle. This will translate into lower-than-expected growth in gross domestic product (GDP) and corporate sector growth in 2022-23 (FY23). Historically, there is a negative correlation between the rupee exchange rate, economic growth, and corporate sector growth in the country.

The correlation coefficient between the year-on-year (YoY) change in corporate sector revenue and the rupee exchange rate is minus 0.63 since 2003-04 (FY04). The correlation is higher at minus 0.74 for the period prior to the Covid-19 pandemic. Similarly, the correlation coefficient between the exchange rate and India’s GDP growth is minus 0.55 since FY04 and the correlation is higher at minus 0.61 for the pre-pandemic period.

Analysts say that growth is the prime driver of this relationship.

“A decline in economic growth results in a decline in foreign capital inflows, leading to currency depreciation. Conversely, faster growth attracts capital inflows, resulting in currency appreciation,” says Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Securities. 

For example, there was sharp depreciation in the rupee immediately after the 2008 global financial crisis as economic and corporate sector growth declined sharply in 2008-09.

Similarly, the rupee shed nearly 10 per cent of its value against the greenback between 2017-18 and 2019-20 (FY20) as GDP growth declined to a 15-year low of 3.73 per cent in FY20.

In contrast, the rupee gained nearly 15 per cent between FY04 and 2007-08 as record high growth attracted foreign capital during the period.

Analysts also say a sharp depreciation can affect growth.

“A decline in capital inflow during a currency depreciation hits capital formation and corporate capital expenditure, resulting in lower economic growth. Depreciation also pushes up the prices of energy, food, and key industrial raw material, translating into higher inflation and lower consumer demand,” adds Sinha.

Last week, Nomura cut India’s expected GDP growth for FY23 to 4.7 per cent, from its earlier projection of 5.4 per cent. By comparison, India’s GDP (excluding indirect taxes and subsidies) had grown 8.1 per cent in 2021-22 (FY22). The slowdown in growth was also evident in FY22, with GDP growing only 4.1 per cent YoY in the fourth quarter of FY22 — the lowest in four quarters.

Others, however, see only a marginal impact from depreciation.

“There will be a downward bias in India’s growth forecast for FY23, but we will wait a little longer to reach a final conclusion before giving our final verdict. As of now, we see only a marginal impact on GDP or corporate sector growth in FY23, given the likely gains from recent decline in commodity prices that could offset the pain from a depreciating rupee,” says Madan Sabnavis, chief economist, Bank of Baroda.