Rupee Appreciation

The main reason for Rupee Appreciation is on account of 1. Huge forex inflow mainly the USD. This inflow is in the form of FDI, ECB, Investment and Remittances. 2. Growing Exports. Resulting in huge inflow in USD thus making the domestic currency appreciate against the dollar. 3. Political Dilemma. Central bank with stringent task to achieve inflation at 4.0 to 4.5% is not in a position to help exporter by means of infusing rupee in the market.

Its all demand and supply. With low interest rates in US, India and other emerging markets are becoming increasingly attractive as an Investment destination for US and other countries. As more and more $$'s are coming to India the supply of $$ is more. That is what is causing the rupee to appreciate. On the flip side many Indian export companies operating on thin margins are facing the heat.

Reasons for Rupee Appreciation Current inflation has eroded the value of the rupee — it buys fewer goods, fewer services and less of everything. Yet as things stand today, the rupee fetches more dollar: nearly 13 per cent more than it did just 10 weeks ago. How did this happen? Since the inflation rate in India is relatively higher than in many other countries that we trade with, the rupee should have depreciated against other currencies. Instead, the exchange value of the rupee has risen significantly. Economists attribute this to a number of factors, but the most immediate and important reason is that the RBI seems to have suddenly lost its appetite for the dollar. When the exchange rate of a currency is market-determined, as is the case with the rupee which is on a free float, supply and demand forces come into play. There has been plenty of dollar supply in the market. In the past, RBI mopped up excess dollars to ensure that the value of the rupee did not shoot up beyond limits, for that would have hurt the country’s exports. In the process, the RBI kept adding to the country’s foreign exchange reserves which have risen to $200 billion. This process of RBI intervention in the market has a cost. For all the dollars the RBI buys, it must release equivalent rupees into the system which goes on to increase money supply in the economy. That was not such a major concern as

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long as domestic inflation was benign. But now, faced with the paramount task of containing inflation by all means, the RBI, in the last couple of months or so, has let the rupee gain in strength. With the main dollar buyer thus missing from the market, the rupee has reached its highest level in nine years. A stronger currency is not a matter of national virility. As economists will tell you, it is normally an indicator of the growing strength of the national economy. By all available indicators, the Indian economy is going through an unprecedented phase of growth. The external sector of the economy in particular, as RBI governor YV Reddy maintains, has been strong and resilient. As Goldman Sachs economist Tushar Poddar notes: “The movement of the rupee is, to a large extent, determined by the interplay of three factors — the current account deficit, the strength of capital inflows, and RBI intervention to curb volatility”. India is running up a deficit in its current payments to, and receipts from, the rest of the world. But this was a moderate deficit of about $18.2 billion last year. The Indian economy is, against that, attracting unprecedented amounts of capital inflows. Just to cite two examples: FDI inflows, which stagnated around $5 billion in previous years, jumped to over $15 billion last year, while foreign portfolio investments added another $8.5 billion. Despite a surge in the oil import bill and a 30 per cent growth in overall merchandise imports; despite a larger number of Indians travelling abroad and splurging more than $7.6 billion last year; and despite Indian companies investing large amounts in overseas takeovers, there is just not enough demand for the dollar that would put pressure on the rupee. Even though the RBI, through its April 24 monetary policy, has sought to encourage a dollar outflow, the point is why would anyone take out dollars when high return on assets in India seems to be attracting a deluge of dollar inflow?

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Rupee Appreciation Boon or Bain….? Whenever currency of a country moves up, it’s usually implicit that the economy of country is doing well. The rupee against dollar has appreciated from Rs 46 in July 06 levels to 40.50 levels in May 07, an increase of more than 10 % in last year.

. The huge FII’s inflows in the country because of booming financial market, RBI allowing ECB borrowings till 2.0 $billion and FDI increase in various sectors led to over supply in Indian forex market .Also the crisis in US mortgage sector has raised concern over working of US economy, Mr. Ben Bernanke has raised concern of a slowdown the US which led to depreciating US dollar. On the contrary Rupee has depreciated against Euro and GBP, so it won’t be prudent to say that the rise in rupee is purely based on growth in economy; it is also because of short term recession in US. Now we are a “Trillion dollar economy” surpassing Russia; we are world’s 12th largest economy. The forex reserves of country are around $ 200 billion (as on March 30th).

Let’s have a closer look on how the importers, exporters and FII’s will get affected? IMPORTERS:-A BOON But all is not gloomy here as the “Rupee at nine year high” is a sigh of relief for importers in the country. The oil marketing companies are already facing the volatility in crude prices resulting in under recoveries and so the appreciating rupee here comes to their rescue.

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According to an IOC official “For every 1 Re appreciation the input cost of crude dips by 2%” The rising rupee will help the government to curb inflation, as the input cost of crude and electronic items will be lowered which will help in fighting the ongoing inflation and hence the interest rates. One of the biggest beneficiaries of rising rupee stands out the borrowers who have borrowed from international banks.The companies like Tata steel, Mcdowell to name a few for their take-over plans of Corus and Whyte & Mackay .As on Dec.2006 the country has an external debt of $142.65 billion dollar so a 7% appreciation in dollar means the external debt is reduced to $132.66 billion (assuming no more borrowings are taken and no repayments made). This is again positive for increasing Gross Deficit of the country. EXPORTERS:- A BANE Given the fact that 76 % of Indian exports market is to the US .The exporters are already feeling the pinch of rising rupee .The IT companies have more than 60% of their revenues from US. It will affect the revenue realization of the IT companies According to a Satyam official “One percent change in rupee will hit the operating margins of IT companies for FY 08 to 30-50 basis points” Apart from IT companies our textile sector is also loosing apart .Last year we clocked a minor 5% growth in our exports to US; whereas China showed a substantial growth of 27% in exports to US .It was on the strength of appreciating rupee that already ailing textile companies were wary of exporting, moreover high production cost due to high interest rate scenario the textile companies stand to loose. Even the gold prices in country are at lower levels compared to world market which makes traders in gold feel the heat. According to an industry analyst “Every 10 paisa appreciation in rupee negates one dollar upward movement in international prices” As a result gold slips in future market between Feb-Apr. 07 Besides the above Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50% of revenues are in dollar terms. Having said this:Now the question arises, Can Government help Ailing exporters? The answer is “YES” For that some steps (tentative) are to be taken:1. The government can reduce export duty for exporters. 2. The government can waive off the custom duty. By doing this government can reduce the burden on exporters and also not getting 4

affected by low excise duty as the importers who will get more profits will help the government with more taxes. Exporters help themselves The exporters should reduce there over-dependence on Dollar In our country 76% of invoicing is done in dollars, the exporters can diversify it by changing their invoicing to more stable and balanced currencies like GBP FII’s FII’s the big guys who are pouring money into Indian financial markets are also loosing. With reference to those investors who entered the Indian financial markets at a dollar rate of 44 are feeling the brunt of depreciating dollar. For instance – take a case of FII who had invested in Indian assets. Assuming that he invested around $1000 US at a rate of Rs 43.50, now after a year his assets have appreciated by 10% to 47850 Rs, but at the same time the dollar has depreciated to Rs 40.50; now the value of his assets would be 44850 instead of 47850; so the net gain to the investor is a humble 3.10 % over a year. So in this scenario Can we expect more FII’s to India? In my opinion, one can be very optimistic regarding the flows from foreign land to India because India is still an untapped market for many of the big investors and we account for only 1% of worlds inflow so keeping this fact in mind and also seeing the growth potential of the Indian economy, I personally think that foreign flows will keep coming to India despite the depreciation in rupee. ConclusionWe have thus seen that appreciation of currency is good for the economic health of our state, though it carries with it certain demerits (mentioned above). But these demerits can be worked upon and transformed into a blessing for the economy.

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