Impact Of

Rupee
Appreciation

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 Rupee Hits Nine Year High

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

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 Rupee Hits Nine Year High

Introduction
From 2003-07 Indian market is booming at leap & bound manner, today after China India is 2nd
fastest 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 (till
30th 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% from
Rs.46 to Rs 39.58. There is a big dilemma in everyone that does it will adversely effect our
economic 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 there
one: some believes that it’s a symbol of booming economy & its beneficial for our economic
growth rate while another school of thought: it’s a impact of recession in US economy and will
adversely effect our country’s economy.

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Causes
 Huge Foreign investment in our country: Nokia, Elcoteq, LG, Motorola, Samsung are
going to set up mobile handset plants. Dell Computers, Flextronics are setting up plants
for PCs & laptops to match growing demand in the country & nearby countries.
Samsung, Taiwan based Foxconn are setting up their plants in India and many more
investments 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 inflows
into 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 $247.762
billion for the week ended September 28, 2007. The rise in reserves is easily an all-time
record. (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 Current
Account surplus for the first time in years due to Increased Merchandise exports and
Invisible, resulted in supplies of Foreign Currency going up sharply and thereby creating
demand for Rupee in FOREX Market.

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

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 ECB borrowings: The External Commercial Borrowings (ECB) are foreign currency
borrowings by Indian companies outside India. ECB provides medium to long term
funds, bridging the gap between domestic savings and capital expenditure. ECB are
permitted as an additional source of finance to Indian companies for financing import of
capital 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 pricing
flexible instruments; has flooded foreign cash inflows in the country especially in
the last months the ECB is 16.1% of the FOREX.

Note: More attractive ECB even at unchanged interest rate differential. Even if the rupee
can 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 to
discourage 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 euro
this year. From India’s perspective, a decline in the dollar against the major currencies
invariably means appreciation for the rupee. (Source: ‘Dollar Under Siege’; Business
Standard , Date 23rd July 2007, page 13)

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

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 Rupee Hits Nine Year High

Impact of rupee appreciation

From Exporters Point of View:

Most developing countries have economies based largely on exports that are competitive
in 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 that
they planned to. This may cause importers to look elsewhere to country's with lower
valued 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 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.
 Today IT industry is growing by 31%, but major operations around 80-85% are
outsourced from US based companies, so this event hampers its growth by few
points but if it will continue for long time then companies like INFOSYS will be
in trap because its 90& operations are for US based companies.

 Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50% of
revenues are in dollar terms. (Source: ‘Rupee Blisters slow export growth to
14% Business Standard: date 2nd Aug 2007, page 13).
 Silk industry had to bear the maximum burnt as it was 71% sensitive to the
hardening of the currency, cotton and jute were less sensitive to the rising rupee at
23% and 18% respectively and IT sector companies were up to 90% sensitive to
rupee appreciation. China is the main competitor of Indian textiles in the global
market. (source: Business Standard:’ Strong rupee hits textiles sectors’,
Date: 31st july 2007).
 Manufacturing industry: It is also facing the same problem because major chunk
of the customers are US Companies and due to that this industry is also suffering
but on other side it have profit also because 70% or above raw material is
imported in USD which gives relief to the company but in this around 11,000
workers lost their job due to this event.

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

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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 price
dip 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:’ Strong
rupee hits textiles sectors’, Date: 31st july 2007)

According to an industry analyst - “Every 10 paisa appreciation in rupee negates one

dollar 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 has
dampening effect on inflation. ( C.Rangarajan, Chairman EAC)

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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 3 rd 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 in
which duty drawback rates had been increased by 1.5% for engineering items.
 Exchange stabilization scheme has been launched which can compensate a portion of the
loss suffered by exporters on account of rupee appreciation.
(Refer: “Exporters seek relief as rupee appreciates”, June 23rd Business Line)

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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’s
competitiveness will rise. They do not think that it is normal for the rupee to appreciate as
a result of greater foreign exchange inflows into the economy. This absurdity will
continue until policy-makers turn their attention to raising productivity of governance
and the competitiveness of the aggregate supply chain. It is a pity that many of India’s
exporters have chosen to rely on a weak rupee to sustain their competitiveness. They
are now deeply disturbed. Their future ‘rupee profitability’ is in jeopardy. They are
horrified that the Reserve Bank of India (RBI) has allowed the rupee to strengthen. They
are nervous that the RBI may have given up its policy of ‘weakening through
intervention’ in the foreign exchange markets.
What they want is a weaker rupee so that India’s export competitiveness
will rise. They want more exports to lead to greater foreign exchange
inflows. They want these inflows to rise so that India can fund its imports.
But the rupee will inevitably strengthen if inflows of foreign exchange
exceed outflows. They will then argue that the strong rupee is a threat to
India’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 sops
turns unprofitable exports profitable. But latest approach states that Competitiveness

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stems from productivity. National competitiveness and economic welfare are determined
primarily by productivity in both the traded and non-traded sectors. It is important to
emphasise that governance is a non-traded sector.
Productivity is the amount of output produced relative to the amount of
resources (human effort, and physical and technological assets) that go
into the production. It is quantitative. It does not depend on the monetary
value of the output relative to the inputs. Productivity and competitiveness
improve when the quantity of output increases relative to the quantity of
input.

By contrast, profitability is the value of output relative to the cost of inputs used. Profitability
improves when the cost of inputs used is reduced relative to the value of output. Sops are aimed
at reducing the cost of inputs without reducing the quantity of inputs. It is no surprise that
superficial commentators love sops.

Profitability also improves when the value of output is raised. The weak rupee is aimed at raising
the rupee value of output without raising the quantity. It is no surprise once again that the
merits of the weak rupee are presented most assertively by those who have no clue about
making 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. has
hiked the CRR to 7% , repo rate to 7.75% to curb the inflation rate(5.5%) , which
increased the floating interest rate and its adversely affects many of the businesses like
real estate and exporters too. According to manufacturing Industry analyst, SMEs share
in exports is 30-35% , a huge part and these SMEs work on credit basis they took loan
from banks sometime at fixed rate & floating rate too so this RBI announcement is also
going to affect them. It’s a cyclic process each change affects the whole economy of
country.

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Country Growth RBI Monetary

Rate Affected Policy (CRR, Repo
rate) Increased

Growth rate High Interest Rate

affected Affects Loan

Business Affected
Like Real Estate

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

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Rupee Vs Dollar, Yen, Euro & GBP

Currencies Year May July 2007 Oct4 2007 % change wef may
2006 2006
Rs in terms of 46.2 41.05 39.58 14.32%
USD
Rs in terms of 59.05 55.35 56.14 4.9%
Euro
Rs in terms of Yen 41.1 33.2 34.06 17.12%
Rs in terms of 86.6 82.2 80.72 6.78%
GBP

(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 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. But following are the things that have to be taken into
consideration too:
 By boosting productivity and improving business conditions, the export growth can
remain buoyant despite stronger rupee. Rapid productivity growth plays an important role
in explaining why a country’s export performance can remain robust even when it’s
currency 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 better
position to deal with crises. ( Source:www. Sifybusiness.com ‘ is rupee appreciation
healthy’)
 Normally foreign currency exposures are covered for a maximum of a year, but now
exporters are contracting forward contracts for 3-5 years to curb the impact of an
appreciating rupee on their profits. Hedging of commodity exposures also risen sharply
with volatility in global markets. (Source: Business standard: 26th sep 2007 “ Exporters
go 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).

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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: nipstherock@yahoo.co.in , nipstherock@gmail.com

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