A depreciating rupee will slow down growth for startups that are already finding it expensive to scale up, besides impacting margins of companies exporting goods and services
With the rupee at 81 against a dollar, startups are likely to see adjustments in their dollar valuations; a weak currency may dislodge some startups from the unicorn club
A tumultuous period is ahead for the stock market. A weak rupee will imply heavy outflows
As the Indian rupee (INR) plunges to a new all-time INR 81 per US dollar, there are serious worries about how this free fall will complicate the life of startups. As of 5 PM on September 26, 2022, the rupee was trading at 81.66 against the USD, its lifetime low level.
Even as INR’s slide continues, the worst for the domestic currency is not over, given related developments. The market is assessing spillover from the US Federal Reserve’s hawkish policy stance. Forex market analysts, therefore, believe INR is set to lose more strength in the near term against the US dollar.
When the rupee fell to 80-level for the first time in July, we had touched on how the depreciation will impact startups that have raised funds in dollars. Experts at the time believed that startups would need to hedge currency volatility risks, like software exporters.
Now, dollar-earning SaaS startups may laugh all the way to the bank, given the steady appreciation against major currencies.
But more pain is in store for startups reliant on imports. For new-age stocks, the bearish phase may stay longer than expected and this is already being witnessed in the decline in stock prices nearly across the board last week.
How A Weak Rupee Impacts Valuation, Investments
Experts believe that investments and valuations of private companies overall may see a big hit too, exacerbating the headwinds from the funding slowdown this year.
It is a rocky road ahead for those startups that wish to raise funds in dollars. And it is set to be an equally tough time for those who have already raised funds in dollars.
According to investment platform We Founder Circle’s cofounder Gaurav Singhvi, foreign investors investing in Indian startups stand to gain because now they would need to invest fewer dollars in the startups they have been negotiating for.
A weak rupee is beneficial for those investing in Indian startups in a foreign currency.
“We do have investors from outside India who invest in Indian opportunities. When the rupee depreciates, the return-on-investment increases by a few more dollars. For example, if they were getting a return of INR 78 on a dollar, with the rupee depreciation, they are getting an approximate increase of 3%-4%.”
Experts concur that a weakening rupee will change the valuations of some startups, including unicorns that have operations abroad. The likes of BYJU’S, Freshworks, Zoho and a slew of SaaS startups are more focussed on the US and the European markets for growth.
“Due to a weak rupee, operational costs (for these startups) can shoot up and sales may come down. Valuations are bound to see a correction too, leading to changes in the unicorn status of some companies that are valued at $1Bn or around there,” added Singhvi
This should worry D2C startups that have been eyeing the global market. Exports from India are going to become costlier across all major line items. If the slowdown in consumer spending in India due to inflation had retail and B2C startups worried, this should be even more alarming.
Besides, startups can expect delays in raising investments in 2022, given that investors are taking longer to complete due diligence and are negotiating hard on valuations.
No End To The Pain For New-Age Stocks
A tumultuous period is ahead for the stock markets. A weak rupee will imply heavy outflows from the equity market.
Market experts are of the view that new-age listed businesses will be vulnerable to such external shocks as they do not have a profitable, self-sustaining model in place yet. Foreign investors are likely to pull out investments in fear of further rupee depreciation.
Most new-age stocks are already trading way below their listing prices. Investors looking to recover their investments may have to stay invested much longer now. Companies aspiring to IPOs would need to go back to the drawing board and reassess their plans, as many have done already.
The combination of high inflation, inflated valuations and rapid capital outflows is likely to result in a deep and sustained selloff.
“It is certainly a warning for the new-age businesses that they are living on borrowed time and the quicker they turn around and figure out a self-sustaining business model, the better it is for them,” Rahul Shah, co-head of research at Equitymaster, told Inc42.
Will RBI Let Rupee Slide Further?
As investors and companies await the full impact of the Fed’s rate hikes, India is a slightly different situation. Sudeep Mishra, cofounder and managing director of investment advisory and consulting firm TresVista, said the question now in everybody’s mind is whether INR 80 – INR 81 is the rupee’s fair exchange value. “I think the RBI supports a further drop. But we have got the reserves to be able to do that. The market decides what’s fair.”
Others also pointed out that there is no fair value of the rupee. Sandeep Bagla, CEO of TRUST Mutual Fund, said that foreign exchange rates — whether it is INR 81 now or INR 75 last year — are arbitrary.
In the short run, another 3%-4% depreciation of the rupee cannot be ruled out, he added, something large private sector banks concur with.
For instance, Kotak Mahindra Bank said that India’s foreign exchange buffer should be sufficient to shield the economy against any major external shock. “We expect the RBI to become more prudent in 2HFY23 while intervening in the forex market and allow the rupee to move in sync with global trends. We pencil in the rupee to range within 79-83 for the rest of FY2023 and average around 80.2 in FY2023E,” Kotak’s research note said.
While the capital flight from India will continue in the short to medium term, there could be a silver lining given that INR has done better against the dollar than the euro or the Japanese yen.
Even as it depreciates against the dollar, the rupee could yet emerge as a better performing currency, compared to the euro or yen.
Plus, the cloud of war hanging over Europe could also give investors a pause, and make them look at India as an upside.
India doesn’t have a labour shortage which is a big problem in Europe, the UK and the US and driving up inflation there, Bagla added. It must be noted that inflation is rising in India too due to post-pandemic pressures and rising fuel prices. “I think there is a counterbalance where I see a lot of positives with India where I don’t think things are going to get as adversely affected as one might think in the traditional sense.”
As a final word of warning though, experts pointed out that India’s dwindling forex reserve is a matter of concern. India’s reserves declined by $5.219 Bn to $545.652 Bn for the week ended September 16, according to RBI data.
The previous week, the reserves had declined by $2.23 Bn, so the pace of decline has doubled in just a matter of days.
“The RBI has already used $80-90 Bn trying to defend the rupee. If one looks at the reserves, after removing non-currency assets like gold, it appears that we are approaching the deficit zone,” added Bagla.
India’s reserves have dipped as the central bank took steps to defend the rupee against a climbing dollar. But if the pace of the drawdown of forex reserves rises unabated, the negative sentiment around investing in India will have a cascading effect. Not only will it make the Indian economy less resilient to external shocks, but it could also accelerate capital flight.
Besides impacting the margins of companies exporting goods and services, a depreciating rupee will also slow down growth for startups that are already finding it expensive to scale up in the Indian market. Plus, the fall in dollar valuations is likely to dislodge many unicorns from their billion-dollar perches.
