Rupee Appreciation & its impact on Indian Economy

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.

Now a hot bubble floating in every Indian’s minds “Rupee Appreciation”. From 2006-07, July to
may value of rupee is highly appreciated by 10.7% from Rs 46 to Rs 40.56. There is a big delimaa
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.

Indian import & export growth rate in march-June 2007 was 34.8% & 18 % respectively which
reduced from April data by 6% & 5% respectively.

In our B-school, it’s really a hot issue from various prospective; academics, market growth &
placement also. Every friend of ours are discussing about this in cafeteria, class etc.

Major reasons of this bubble are:

Huge foreign Investment in our country

FIIs Inflow
ECB borrowings
Slowdown of US economy
Huge foreign Investment in our country: According to Business world, 6th Aug, 2007 edition; huge
FDI is expected 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.

In our country 70:30 ratio of import & export respectively (data from commerce deptt.) in which
major export destination of India are OCED (USA, EU, Japan) and Brazil & other asian countries
but large chunk of exports to the OCED countries.

From Importers point of view:

“Rupee at nine years high”-

Oil companies are highly benefitted- more than 80% crude oil 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 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%.
Suppose:

US bank/agency-------------------$100 (2006) ---------------------Indian 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.

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

From Exporters point of view:

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.

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

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. While TCS, WIPRO etc have lesser share in US market and these are available in
European countries also, so for them it’s not a big threat for a time being.

Other major problem faced by IT companies is its onsite employees because company is paying
them in Indian currency but with event they are bound to pay more and according to one report
about 6-8% employees are onsite at one time. Mainly main suffers in this industry are entry level
engineers, mangers etc.

Manufacturing Industry: Its also facing same problem because major chunk of 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.
Besides the above Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50%
of revenues are in dollar terms.

This event is a lesson to Indian exporters that overdependence on US market is big threat so they
will have to search new markets i.e. Asian countries, EU, Brazil etc

Design new strategies to reduce operational cost etc.

Role of RBI & Indian government:

Recently in monetary policy (2007-08) RBI increased CRR by 50 points i.e. 7% and increased its
repo rate to 7.5% to curb the inflation rate (5.5%), which increased the floating interest rate and it’s
adversely affects many of business 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.

RBIs monetory
policy(CRR)

country
high interst rates
economic growth
affects loans
affected

Businesses
growth rate
affected i.e. real
affected
estate, SMEs
Govt. initiatives to protect exporters:

Tax incentives, interest reductions, reduction in service taxes

Export duty reduction & waive custom duty
Forward contracts with customers to protect ours interest( exporter)

Conclusion-

Rupee Vs Dollar, Yen, Euro & UK pound

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.

For more articles related with this issue and other happenings in our country day by day.

Visit on: http://dyutita.blogspot.com/

Drafted by: M.P.Singh MBA final yr (ICFAI Business School, Hyd)

Supported by: Harish raj Shetty, Naval.K.Pratihast & Saurabh Raja (same batch & college)