DETERMINING WHAT CAUSES CURRENCY TO WEAKEN OR STRENGTHEN IS AN EVOLVING ART AND IT IS MORE OF AN ART THAN SCIENCE
THE APPRECIATING rupee is posing a unique set of challenges for the Indian economy. The impact would not be limited to macro economy alone but it will also affect down to the level of firms under various sections of economy. This is conceptual study based on Rupee Dollar relationship in terms of Rupee appreciation that is dollar depreciation and rupee depreciation that is dollar appreciation. It provides valuable insights into impact of changes in currency relations on various sectors of economy keeping in focus economy in general and Indian economy in particular. Pros and Cons of currency appreciation and depreciation are studied as boon and bane for the economic growth. It also provides suggestions or steps needed to control as well as to overcome ill-effects of excessive fluctuations between rupee and dollar keeping in view current trends.
Determining what causes currency to weaken or strengthen is an evolving art and it is more of an art than science.
In India, level of foreign exchange reserve being low in the past and demand for foreign currencies particularly dollar being heavy, the dollar always used to be at premium. Consequently, rupee used to be weak against dollar in the foreign exchange market which is changing now and rupee is becoming strong.
The appreciating rupee is posing a unique set of challenges for the Indian economy. The impact would not be limited to macro economy alone but it will also affect down to the level of firms under various sections of economy. RBI has accumulated reserves by buying dollars thereby reducing its supply. Buying of dollars has released rupees that have added to money supply.
Heavy dollar inflow and selling pressure from exporters have pushed rupee higher. Increase in flow of funds through foreign institutional investors is another important reason for appreciation of rupees.
The appreciating rupee is going to affect various sectors of economy in different ways may be positively or negatively.
RUPEE APPRECIATION IN RELATION TO DOLLAR AS A BOON
The biggest beneficiary from appreciation of the rupee are the importers as they have to pay less in terms of dollars i.e. more dollar denominated goods can be purchased by paying lesser amount of rupee.
Since import cost will decrease energy dependent sectors will benefit more comparing to others.
Companies that source raw materials from the global market and are largely domestic demand driven could witness improvement in margins.
It is also beneficial for the capital goods sector as large number of equipments and machineries are imported.
It is also a good sign for government’s financial health because in the long run a stronger rupee would be sound for the Indian economy and will bring India’s purchasing power at par with other currencies.
Oil marketing companies like BPCL, HPCL, and IOC which import crude oil will also be benefited.
Telecom companies like AIRTEL, Idea with huge requirement for import capital expenditure stand to gain from a rise in the rupee.
As far as foreign exchange markets are concerned, the rupee has become favoured currency. With the rupee gaining in value, there is a demand for rupees with exporters dumping dollars.
RUPEE APPRECIATION IN RELATION TO DOLLAR AS A BANE
Exports which constitute about 12% of India’s $854 billion economy would have grown faster had the rupee not appreciated to a 9 yr high and eroded earnings of the exporters.
An appreciating rupee impacts our export competitiveness adversely. Exports of goods which compete only on price with very low margins are expected to come down whereas more value added exports which have higher import content or which are less price sensitive would be less affected.
India’s foreign structure does not support strong rupee since it includes leather, textiles, gems and jewellery and most of the manufacturers and exporters are medium and small sized who are operating on low margins and they can not absorb currency risks.
Hedging of currency is not popular in India as what it is in other developed countries due to high costs.
For IT companies and exporters, the rising rupees means a fall in the operating margins and increased costs as they will receive less rupees for each dollar earned. Approximately, two-thirds of India’s IT revenue is in dollar terms.
Hotel industry would be affected as major portion of their sales is from abroad and there is appreciation of rupee.
Strengthening rupee is cause of concern for commodity sector. US being the largest importer, majority of the Indian commodity exports are dollar denominated. The metal companies especially the iron-ore exporters would be badly affected as they will have to give up the gains accruing from higher global commodities prices on account of falling dollar.
The initial success story of India was clearly based on factor driven economy based on labour arbitrage that is providing low cost labour in comparison to another country. At this stage development is sensitive to global business cycle and exchange rate fluctuation.
We need to move towards being investment driven economy that is efficiency driven in the form of infrastructure development, improving skill of work force and make that investment which translate into tangible productivity across the board.
Final stage which can make India to be developed economy is to be innovation driven economy that can create unique value of India at global economy level. We need to accelerate reform process that would make economy resistant to external shocks and changes in economy cycles and currency fluctuations. The bottom line is our policy should concentrate on enhancing our capability in manufacturing, promote entrepreneurship and provide incentive for innovations. We need to remember that the challenge which we are facing is not only about currency risk but it is about moving to growth and development.