NEW DELHI—As India’s economy shifted into low gear earlier this year, sales at the country’s largest car manufacturer also lost steam, falling nearly 7% in the second quarter from a year earlier.
Now the auto maker, Maruti Suzuki India Ltd., faces trouble on a new front: the rapid drop in the Indian currency. The rupee has slumped nearly 3% against the dollar since last Wednesday and roughly 15% since May.
“If the rupee remains where it is, it is going to hurt everybody across sectors,” Maruti Suzuki Chief Financial Officer Ajay Seth said Tuesday. “All the fundamentals have become very difficult right now.”
India’s tumbling currency and the possibility of slower growth are adding to the challenges confronting companies in India—just as some multinationals already were having second thoughts about investing here. Overburdened infrastructure, serious power shortages, difficulty obtaining land and government red-tape pose significant hurdles for business in India.
When India’s economy was growing at an average of more than 8% a year, as it did from 2004 to 2011, the prospects in the world’s second-most-populous nation outweighed the risks.
But with gross domestic product now growing at about 5%, that calculus has changed.
A series of high-profile foreign companies, including South Korean steelmaker Posco and U.S. retailer Wal-Mart Stores Inc.,recently have withdrawn, scaled back or delayed plans in India.
On Tuesday the rupee touched a new low of 64.11 to the dollar before recovering slightly. Meanwhile, foreign investors were net sellers on the Bombay Stock Exchange, helping pull its S&P Sensex index down 0.3% after already dropping more than 5% this month.
The rupee’s decline—as funds have flowed out of the country in anticipation that the U.S. Federal Reserve would curtail years of easy-money policies that made investing here attractive—has direct and indirect effects on companies here.
For Japan’s Suzuki Motor Corp., which owns roughly 56% of Maruti Suzuki, the declining rupee could mean lower earnings at home and in India, a spokesman said.
Maruti’s import costs for parts from Japan increase as the rupee weakens. The Indian unit’s royalty payments to the Japanese company, which are denominated in yen, become more expensive as well.
Suzuki’s current earnings forecast assumes the rupee will fetch an average of 1.6 yen from last month through the end of the fiscal year in March, the spokesman said. Any weaker figure will hurt earnings, he said. The Indian rupee bought 1.53 yen on Tuesday.
The rising cost in rupees of imported components is being felt broadly by manufacturers. Electronics companies here, which use a high proportion of imported parts, already are raising prices in India.
Samsung Electronics Co last month raised prices of its mobile phones and other consumer electronics by 2% to 3% to compensate for the increased cost of importing components, a spokeswoman said.
Some industries stand to benefit handsomely from the weak rupee.
Large Indian information-technology outsourcing companies such as Wipro Ltd., Infosys Ltd. and Tata Consultancy Services Ltd. generate more than 90% of their revenue from outside the country. Most have to convert foreign revenues into rupees. Consequently, a 1% decline in the value of rupee against the dollar may add to the profits of such companies by nearly 2.5%, said Sandeep Muthangi, an analyst with Mumbai-based brokerage firm IIFL Capital.
But the rupee’s drop indirectly raises borrowing costs. India’s central bank, moving to defend the currency and keep inflation in check, has nudged interest rates higher and could continue to do so if the currency continues to drop. That, in turn raises the price of borrowing for consumers and companies, weighing on economic growth.
“The falling rupee is a vote of no confidence against the government. Unless you address the fundamentals, nothing is going to change,” said Ravi Venkatesan, a former chairman of Microsoft Corp.’s India operation and author of a book on investing in India. “It is the underlying issues which should really be of greater concern: the growing [trade] deficit, weakening economy, difficulty in doing business.”
If the dropping rupee—and rising prices—force the government to open up the economy further, that might not be bad, Mr. Venkatesan said.
“We seem to act and reform only when there is a crisis,” he said.
—Santanu Choudhury in New Delhi, Dhanya Ann Thoppil in Bangalore and Hiroyuki Kachi in Tokyo contributed to this article.-WSJ
