The rupee is where? Currency collapse confounds India Inc.

An Indian vendor speaks with a customer at a flower market in New Delhi in August.
Andrew Caballero-Reynolds | AFP | Getty Images
An Indian vendor speaks with a customer at a flower market in New Delhi in August.

Companies such as Whirlpool of India say they can't plan more than a couple of months ahead as a fast-falling rupee drives up the cost of imports, forcing them to raise prices even while consumer spending crumbles.

The timing is particularly tough for consumer companies that were counting on India's September-to-December holiday season to spur sales. Shoppers, who helped see the country through the global financial crisis in 2008, are closing their wallets, squeezing companies that make everything from automakers to shampoo.

Those that import finished goods or raw materials are the worst hit as they scramble to hold onto margins and balance the need to raise prices without deterring buyers.

"We are now planning for a month or three months at best, unlike six months or a year," said Shantanu Dasgupta, vice president for corporate affairs and strategy at Whirlpool of India, a division of Whirlpool, the world's largest maker of home appliances.

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The Indian rupee has tumbled 17 percent this year and hit an all-time low of 66.30 against the dollar Tuesday, despite interventions by the central bank and the government as investor fears about emerging markets deepened in anticipation of reduced U.S. monetary stimulus.

"A week back in our office we were working at [a rupee exchange rate of] 62, and now it's at 64 and looks like soon it will fall more and hit 67, said H.S. Bhatia, head of the enterprise business at television maker Videocon Industries, in an Aug. 21 interview. "How can a business operate when the currency is in free fall?"

The currency selloff has since intensified, compounding difficulties for Videocon. The collapsing rupee pushes up the price of goods, adding inflation to meager urban salary increases and an economy growing at its slowest pace in a decade.

Videocon, which imports raw materials, plans to raise prices by 4 percent to 5 percent in the coming days, its second hike in two months.

The currency blow is landing just as consumer companies look toward their strongest annual sales period, which starts in September with Ganesh Chaturthi (when Hindu homes welcome the god of luck and prosperity) followed by the Diwali festival and then Christmas.

India's total expenditure, which includes private and government spending, grew 3.3 percent between January and March compared with 9.3 percent in the same period last year, according to government estimates.

Cutting back all over

Indian shoppers are cutting back not only on big-ticket purchases such as refrigerators, TVs or high-end branded apparel but staples such as soap and condiments.

A June survey by the Associated Chambers of Commerce and Industry found bills for middle-class households had jumped 15 percent to 20 percent from May across major cities as the declining rupee made items such as petroleum products and edible oil more expensive.

A paper by the same group in August found that even those with deep pockets were being more frugal. Five-star hotels and fine dining restaurants reported a 20 percent sales decrease in the previous three months on higher prices for imported food ingredients and spirits.

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Makers of standard consumer goods like shampoo and soap, popular defensive plays in weak economic times, are also feeling the pinch, with market leader Hindustan Unilever posting lower sales volumes for a fifth straight quarter in June.

"India is witnessing a slowdown, and only recently, in the past quarter, has it been so pronounced," said Manish Tiwary, executive director of sales and customer development at Hindustan Unilever.

Apparel retailer Provogue India has shut several stores in the past 12 months and is moving cautiously on expansion with a focus on franchisee-run stores.

"It is a tough environment to operate in, and Indian consumers are seeking even more value in the current market, which impacts both sales density and margins," Provogue business head Timothy Eyon said.

The country's largest retail conglomerate, Future Group, has an additional problem in trying to reduce its debt of 40 billion rupees.

Its plan to raise 6 billion to 8 billion rupees ($91 million to $121 million) this fiscal year by offloading stakes in fashion brands to strategic and private equity players has been drummed as currency volatility and weak capital market conditions have spooked investors, said Future's chief financial officer, C.P. Toshniwal.

Hikes and hedges

While many consumer companies have resorted to price increases, long-term supplier contracts and hedging are helping some now.

Daimler AG's Mercedes-Benz has held off on a price hike even though it faces severe margin pressure from the sliding currency and rising fuel costs, but it may relent soon.

"We didn't get immediately affected by the weakening of the rupee, as we have a long-term hedging strategy," said Eberhard Kern, managing director at Mercedes-Benz India. "However, the hedging period cannot be forever, and we have to ensure that we run a sustainable business in the long term."

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Similarly, clothier Lacoste India is expecting a hit on its margins but will hold off on a price hike until year-end, said CEO Rajesh Jain. The company imports raw materials such as yarn, but long-term supply contracts have so far insulated it from currency-related price increases of 15 percent.

That will be little comfort if demand stays weak, however.

"Growth has come to a grinding halt, but that's not the only bad part," Whirlpool's Dassgupta said. "Demand is not likely to improve anytime soon, and that's more worrying."

—By Reuters