Rupee Appreciation & its impact on Indian Economy

From 2003-07 Indian market is booming in leaps & bounds, today after China India is 2^nd fastest growing economy of the world with a growth rate of 9.4% in the first quarter. It’s a “trillion dollar country surpassed Russia & has become world’s 10^th largest economy, today (till 30^th march, 2007) Indian forex reserve is around $200 bn.

Now the hot bubble floating in every Indian’s mind is “Rupee Appreciation”. From July,2006-May,2007, value of rupee has highly appreciated by 10.7% from Rs 46 to Rs 40.56. There is a big dilemma in everyone's mind, will the rupee appreciation adversely effect our economic growth or is it an indicator of Indian growing economy?

Indian import & export growth rates in March & June 2007 were 34.8% & 18 % respectively which reduced from April 2007 by 6% & 5% respectively.

In our B-school, it’s a hot issue from various perspectives; academics, market growth & placements also. Every friend of ours is discussing about it.

Major reasons of this bubble are:

• Huge foreign Investment in our country

• FIIs Inflow

• ECB borrowings

• Slowdown of US economy

In our country there is 70:30 ratio of import & export respectively (data from commerce dept.) in which major export destinations of India are OCED (USA, EU, Japan) and Brazil & other Asian countries but a large chunk is exported to the OCED countries.

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

From Importers point of view:

“Rupee at nine years high”-

• Oil companies are highly benefited- more than 80% of crude oil is import gulf and other countries.

According to IOC manager’s statement: “for every Rs1 appreciation crude oil price dip by 2%”

• Recent acquisitions made by Indian companies’ i.e.

· UB group- Whyte & Mackay

· TATA steel-Corus etc these companies are benefited.

• International borrowing (from US banks) by Indian companies.

• Beneficial for country external debts because 10% increase in Rs reduce the debt amount by 10%.

Suppose:

US bank/agency-------------------$100 (2006) ---------------------àIndian company borrowing in Rs term= Rs 4600

Given: $1= Rs 46 (July, 2006)

US bank/agency<-------------------$100 (2007) ---------------------Indian company paying in Rs term= Rs 4000 +interest

Given: $1=Rs 40 (June, 2007)

Here company is getting profit of Rs.600

• Consumer electronic goods, imported apparels etc will be available at cheapest price.

From Exporters point of view:

Around 30% of the exports will surely be affected at one hand. According to commerce ministry report (Oct, 2006) around 86% of export & 89% import deals invoiced in USD. So, in this case exports houses will suffer badly.

Major exports houses of India are:

• IT & ITES industry i.e. (Software, hardware & BPOs), Manufacturing industry (Steel pants, automobile industry, Textile etc), Tourism Industry, Pharma Industry (i.e. Ranbaxy, Cipla etc),

• Hospitals have (cheapest surgeries compared to US hospitals etc), FIIs etc

• Manufacturing Industry: This industry has also suffered as mainly the customers are US companies. But as the raw material is also imported mainly(about 70%) in USD, the import actually has offset the losses due to export to some extent. The loss has forced the industry to cut it workforce by 11,000.
  

• Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as 50% of their revenues are in dollars.

Govt. initiatives to protect exporters:

• Tax incentives, interest reductions, reduction in service taxes

• Export duty reduction & waive custom duty
• Forward contracts will also be beneficial for exports to protect themselves from losses.

Conclusion-

Currencies	Year (may, 2006)	Year (July, 2007)	Change %
Rs in terms of USD	46.2	41.05	11.12%
Rs in terms of Euro	59.05	55.35	6.26%
Rs in terms of Yen	41.1	33.20	19.22%
Rs in terms of Pound	86.55	82.20	5.02%

According to the given above we can conclude that rupee is appreciating with all currencies given above which reflects that Indian economy is doing very well, 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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