impact of rupee appreciation

45

42

43

44

41

Impact OfRupee

Appreciation

Rupee Hits Nine Year High

of 14

Table of Contents

S.No. Topic Page No.

1 Introduction 3

2 Causes 4

3 Impact

On Exporters 6

On Importers 8

Other Impacts 8

4 Role of govt. 9

5 Flaws in govt.’s action 10

6 Conclusion 13

7 Bibliography 14


of 14

Introduction

From 2003-07 Indian market is booming at leap & bound manner, today after China India is 2ndfastest growing economy of the world with the growth rate of 9.4% in the first quarter. It’s a“trillion dollar country surpassed Russia & become world’s 10th largest economy, today (till30th march, 2007) Indian forex reserve is around $200 bn.

From july 2006- to sep 2007 the value of rupee is highly appreciated by 13.9% fromRs.46 to Rs 39.58. There is a big dilemma in everyone that does it will adversely effect oureconomic growth or it’s an indicator of Indian growing economy.

There are so many research are going on this issue and there are two school of thoughts are thereone: some believes that it’s a symbol of booming economy & its beneficial for our economicgrowth rate while another school of thought: it’s a impact of recession in US economy and willadversely effect our country’s economy.


of 14

Causes

Huge Foreign investment in our country: Nokia, Elcoteq, LG, Motorola, Samsung aregoing to set up mobile handset plants. Dell Computers, Flextronics are setting up plantsfor PCs & laptops to match growing demand in the country & nearby countries.Samsung, Taiwan based Foxconn are setting up their plants in India and many moreinvestments are in pipeline. (Refer: business world 6th aug 2007).

Initially rupee strengthened (3.52% march) on the back of the stronger Asian markets.(Refer : “ External Commercial Borrowings”, Treasury Management: May2007).

FII inflow: The rupee's gains have been mostly on account of continued capital inflowsinto the country, while the central bank’s sterilisation programme has helped fuel inflation.The country’s foreign exchange reserve is surged by $11.871 billion to touch $247.762billion for the week ended September 28, 2007. The rise in reserves is easily an all-timerecord. (Refer: “Foreign Reserves Swelled By $11.9b”; Business Line, Oct 5).(over $3.9bn net inflows in the first 10 months of this Fiscal). In India there is a CurrentAccount surplus for the first time in years due to Increased Merchandise exports andInvisible, resulted in supplies of Foreign Currency going up sharply and thereby creatingdemand for Rupee in FOREX Market.

(Refer: “Report On Foreign Exchange Reserves”, www.rbi.org.in).


of 14

ECB borrowings: The External Commercial Borrowings (ECB) are foreign currencyborrowings by Indian companies outside India. ECB provides medium to long termfunds, bridging the gap between domestic savings and capital expenditure. ECB arepermitted as an additional source of finance to Indian companies for financing import ofcapital goods, new projects, and modernization etc especially of SMEs.

Since ECB carries the benefits of low cost of capital (LIBOR rates 1.3% to 6.3%as compared to 10-14% of Indian Public Sector banks), international pricingflexible instruments; has flooded foreign cash inflows in the country especially inthe last months the ECB is 16.1% of the FOREX.

Note: More attractive ECB even at unchanged interest rate differential. Even if the rupeecan fall over overvalued, then the balance would tie up the other way.

(Refer : “ External Commercial Borrowings”, Treasury Management: May2007).If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has todiscourage ECB. Given the higher and rising interest rates in India, it is difficult to do so,unless the RBI puts more restrictions on ECB. But the RBI is unlikely to do this.(Refer: “Rising Rupee: Causes & Consequences”; Business Line, june15)

Slowdown of US economy: The dollar has lost about 5% against the pound and the eurothis year. From India’s perspective, a decline in the dollar against the major currenciesinvariably means appreciation for the rupee. (Source: ‘Dollar Under Siege’; BusinessStandard , Date 23rd July 2007, page 13)

US Fed Reserve rate was cut by 50 basis points there by making the interest rate moreattractive in the emerging markets especially Indian markets, which lured inflows thereby appreciating the rupee. (Source: Business Standard, ‘ Rupee jumps on Fed Reserverate cut, liquidity improves’ , date: 20th sep 2007).


of 14

Impact of rupee appreciation

From Exporters Point of View:

Most developing countries have economies based largely on exports that are competitivein global markets because of low prices. When those countries' currency gains value,they are no longer able to offer exports to the global market at the same low prices thatthey planned to. This may cause importers to look elsewhere to country's with lowervalued currency and thus prices or to order less than they would have otherwise.

Around 30% of share of exports in economy which will surely be affected at onehand. According to commerce ministry report (Oct, 2006) around 86% of export& 89% import deals invoiced in USD. So, in this case exports houses will sufferbadly.

Today IT industry is growing by 31%, but major operations around 80-85% areoutsourced from US based companies, so this event hampers its growth by fewpoints but if it will continue for long time then companies like INFOSYS will bein trap because its 90& operations are for US based companies.

Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50% ofrevenues are in dollar terms. (Source: ‘Rupee Blisters slow export growth to14% Business Standard: date 2nd Aug 2007, page 13).

Silk industry had to bear the maximum burnt as it was 71% sensitive to thehardening of the currency, cotton and jute were less sensitive to the rising rupee at23% and 18% respectively and IT sector companies were up to 90% sensitive torupee appreciation. China is the main competitor of Indian textiles in the globalmarket. (source: Business Standard:’ Strong rupee hits textiles sectors’,Date: 31st july 2007).

Manufacturing industry: It is also facing the same problem because major chunkof the customers are US Companies and due to that this industry is also sufferingbut on other side it have profit also because 70% or above raw material isimported in USD which gives relief to the company but in this around 11,000workers lost their job due to this event.


of 14

(Refer: ‘Strong Rupee Hits Textile Sector’, Business Standard, 1st Aug 2007)


of 14

From importer’s point of view: Oil companies are highly benefitted, more than 80% crude oil import gulf and

other counties. Acc to IOC manager: “for every Rs1 appreciation crude oil pricedip by 2%”.

Recent acquisitions made by Indian companies:o UB Group- whyte & Mackay.o TATA steel – Corus are Benefitted.

International borrowing (from US Banks) by Indian Companies. Beneficial for country external debts because 10% increase in Rs reduce the debt

amount by 10%. Consumer electronic goods, imported apparels etc will be available at cheaper

price. The sectors like gems and jewellery were not much affected as India’s competitor

Thailand was also hurt by rising currency. (source: Business Standard:’ Strongrupee hits textiles sectors’, Date: 31st july 2007)

According to an industry analyst - “Every 10 paisa appreciation in rupee negates onedollar upward movement in international prices”

Other Impacts: Small exporters are hit badly by rupee appreciation as they have limited access to

hedging products. Companies like Hyundai plans to reduce the dollar-denominated exports of its cars to

counter the appreciation of the rupee against dollar.(Refer: “Re: Rise Hyundai plans denominated exports”, Business Line, Oct 6th).

Rupee appreciation has helped control inflation. The appreciation of the rupee hasdampening effect on inflation. ( C.Rangarajan, Chairman EAC)


of 14

Role Of Govt.

Govt. initiative to protect exporters. Tax incentives, interest reductions, reduction in service taxes. The interest on exportis

reduced to below five per cent and allowing conversion of shipping bills.(Refer: FICCI publications. “ FICCI reaction on Rupee Appreciation” sep 3rd 2007).

Export duty reduction & waive custom duty Forward contracts with customers to protect exporter’s interest. Purchase of dollars from the markets by RBI to stem the rise of rupee appreciation by

curbing the liquidity; however is a short term remedy. (Source: Business standard: 26th

sep 2007 “ RBI intervention checks Re”)

Other Measures: Establishment of various councils such as Engineering Export Promotion Council

(EEPC) in which DEPB (Duty Entitlement Passbook) Scheme has been launched inwhich duty drawback rates had been increased by 1.5% for engineering items.

Exchange stabilization scheme has been launched which can compensate a portion of theloss suffered by exporters on account of rupee appreciation.(Refer: “Exporters seek relief as rupee appreciates”, June 23rd Business Line)


of 14

Flaws in the Govt./ RBI measures to control rupee acceleration

I. Weaker Currency is not a cure at all

One School of Thoughts: Policy makers wants a weaker rupee so that India’scompetitiveness will rise. They do not think that it is normal for the rupee to appreciate asa result of greater foreign exchange inflows into the economy. This absurdity willcontinue until policy-makers turn their attention to raising productivity of governanceand the competitiveness of the aggregate supply chain. It is a pity that many of India’sexporters have chosen to rely on a weak rupee to sustain their competitiveness. Theyare now deeply disturbed. Their future ‘rupee profitability’ is in jeopardy. They arehorrified that the Reserve Bank of India (RBI) has allowed the rupee to strengthen. Theyare nervous that the RBI may have given up its policy of ‘weakening throughintervention’ in the foreign exchange markets.

What they want is a weaker rupee so that India’s export competitivenesswill rise. They want more exports to lead to greater foreign exchangeinflows. They want these inflows to rise so that India can fund its imports.But the rupee will inevitably strengthen if inflows of foreign exchangeexceed outflows. They will then argue that the strong rupee is a threat toIndia’s competitiveness. There will be more sops.

Other School of thoughts (Modern Approach) or Productivity & Competitiveness:The reason for the above schools of thoughts is simple ad straight forward, that the sopsturns unprofitable exports profitable. But latest approach states that Competitiveness


of 14

stems from productivity. National competitiveness and economic welfare are determinedprimarily by productivity in both the traded and non-traded sectors. It is important toemphasise that governance is a non-traded sector.

Productivity is the amount of output produced relative to the amount ofresources (human effort, and physical and technological assets) that gointo the production. It is quantitative. It does not depend on the monetaryvalue of the output relative to the inputs. Productivity and competitivenessimprove when the quantity of output increases relative to the quantity ofinput.

By contrast, profitability is the value of output relative to the cost of inputs used. Profitabilityimproves when the cost of inputs used is reduced relative to the value of output. Sops are aimedat reducing the cost of inputs without reducing the quantity of inputs. It is no surprise thatsuperficial commentators love sops.

Profitability also improves when the value of output is raised. The weak rupee is aimed at raisingthe rupee value of output without raising the quantity. It is no surprise once again that themerits of the weak rupee are presented most assertively by those who have no clue aboutmaking the Indian economy more productive and more competitive

(Refer: “ Weaker Rupee is not the cure at all”, Business line, July 19)

II. Change In Monetary Policy (CRR, Repo, Reverse Repo rate): Recently govt. hashiked the CRR to 7% , repo rate to 7.75% to curb the inflation rate(5.5%) , whichincreased the floating interest rate and its adversely affects many of the businesses likereal estate and exporters too. According to manufacturing Industry analyst, SMEs sharein exports is 30-35% , a huge part and these SMEs work on credit basis they took loanfrom banks sometime at fixed rate & floating rate too so this RBI announcement is alsogoing to affect them. It’s a cyclic process each change affects the whole economy ofcountry.


of 14

(Refer: “ Weaker Rupee is not the cure at all”, Business line, July 19)

RBI MonetaryPolicy (CRR, Repo

rate) Increased

Growth rateaffected

Country GrowthRate Affected

Business AffectedLike Real Estate

High Interest RateAffects Loan


of 14

Rupee Vs Dollar, Yen, Euro & GBP

Currencies Year May2006

July 2007 Oct4 2007 % change wef may2006

Rs in terms ofUSD

46.2 41.05 39.58 14.32%

Rs in terms ofEuro

59.05 55.35 56.14 4.9%

Rs in terms of Yen 41.1 33.2 34.06 17.12%Rs in terms ofGBP

86.6 82.2 80.72 6.78%

(Source: Business Standard: Date: 27th July, Oct 4th 2007; section II Money & Market)

Conclusion:According to the given above we can conclude that rupee is appreciating with all currenciesgiven above which reflects that Indian economy is doing very well, though it carries with itcertain demerits (mentioned above). But these demerits can be worked upon and transformedinto a blessing for the economy. But following are the things that have to be taken intoconsideration too:

By boosting productivity and improving business conditions, the export growth canremain buoyant despite stronger rupee. Rapid productivity growth plays an important rolein explaining why a country’s export performance can remain robust even when it’scurrency strengthens.

All currencies would ultimately have to move towards a flexible exchange rate regime,and by moving upwards first rather than downwards, economies would be in a betterposition to deal with crises. ( Source:www. Sifybusiness.com ‘ is rupee appreciationhealthy’)

Normally foreign currency exposures are covered for a maximum of a year, but nowexporters are contracting forward contracts for 3-5 years to curb the impact of anappreciating rupee on their profits. Hedging of commodity exposures also risen sharplywith volatility in global markets. (Source: Business standard: 26th sep 2007 “ Exportersgo long to cover Re Effect”)

In any case, weaker rupee would provide no guarantee that the exports would grow faster.(Source: ‘ Stronger rupee: End of India’s export boom’; Business Standard: date 6th

Aug 2007, page 13).


of 14

Bibliography:

Newspaper Referred:

Business Standard

Business Line (e news paper)

Financial Express

Websites Referred:

www.ficci.org

www.businessline.com

www.rbi.org.in

www.ndtvprofit.com

www.hindu.com

www.indianexpress.com

Magazines Referred:

Business World

Business line

Thank You:

NIPUN MAHAJAN (MBA FINANCE), IMM, New Delhi

Mobile: 91+9971319385

Email: [email protected] , [email protected]

impact of rupee appreciation

Documents