Impact of Dollar on Indian Economy
As US dollar comes down crashing on euro and yen, Indian Rupees move little compared to US Dollar and keeps falling compared to UH pound and Euro. The way India¶s central bank has handled the currency volatility is interesting. The main source of outsourcing contracts is America. European and Japanese companies literally survives by selling to America. Seventy percent of outsourcing contract originate from US demands. Consequently as US Dollar declines compared to Indian Rupees, India will lose the edge of lower cost compared to US Labor force. But that is not happening. Like China, India has pegged its currency to US Dollar. As a result, Indian currency floats on the basis of US Dollar values and hence there is no question of reduction in the number of outsourcing contracts. Three factors may however, change that scenario in 2005. First is that the US Administration will require India and China to revaluate their currency and allow free floating instead of pegging to US Dollar. Second, the higher oil price will provide an added incentive for India and China to revaluate their currency. Higher value of Rupees compared to Dollar or Euro effectively lowers the domestic Petroleum prices since 70% of the same is imported. Third, the World Trade Organization requirements of Process Patent Law implementation will also provide and added incentive for India to revaluate the currency. Outsourcing IT, Telecom and other services to India was supposed to be a temporary transition process. As the Western economies automate through use of Robotics and automated code generation techniques, the recitative tasks that are outsourced from India will reduce in volume over time. However, with Indian Rupees revalued to even a marginal extent may kill outsourcing even within a few years.
To better understand the fluctuating dollar value against the rupee, let us get to know some basics: Exchange rate ± the rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another. Foreign exchange market ± Also known as ³Forex´ or ³FX´. It is a market to trade currencies Indian foreign exchange rate system ± India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case
plastics. Impact of dollar fluctuations on the Indian economy Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. textiles. which could be passed on to consumers. To keep up its demand for consumption. This gap widened during Iraq¶s attempt to take over Kuwait. This resulted in the depreciation of the dollar¶s value.35 = $1 as on 16 Nov 2007. leather products. To control inflation US resorted to increase in interest rates to cool down pressure on demand side of consumption. Exporters 2. The mentioned export items contribute substantially to foreign receipts. Balance of payment (BOP) of any country is the balance resulting from the flow of payments/receipts between an individual country and all other countries as a result of import/exports happening between an individual country. chemicals. exporters stood to gain. 4800 for every $100. particularly real estate. However. pharmaceuticals. jewelry. rupee appreciated by about 10%. which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. exports also contributed to FX reserve along with Foreign Direct Investment into the Indian economy and reduced the BOP gap Indian rupee appreciation against dollar impacted heavily to the following: 1. since there is huge inflow of foreign capital into India in US dollar Why is the US dollar walking down? ± When it comes to the US being a consumer. This created a state of inflation and made consumables costlier to US. in our case India and rest of the world. when $1 = Rs.of the US dollar against the rupee. this could not last long because the oil price rise in the 1970s and 80s created a big gap in India¶s balance of payment. 3935. Importers 3. 4800 paid during yester years for every $100. This difference is towing away the profit margins of exporters and BPO service providers alike. capital goods. This created pressure since there were more payments in dollars than receipt of any other currency. This gain on FX is likely to create savings in cost. exporters would get only Rs. Since the 1990s. industrial machinery. was getting them Rs. pulp paper etc. India is the world¶s largest processor of diamonds. Since the beginning of the year 2007. if we analyze . gems.an importer is paying Rs. which again caused more outflow of dollar for import payments. dyes. Imports to India are of petroleum products. Foreign investors Exports from India are of handicrafts. ready-made garments. chemicals and related products. for every $100. thereby contributing to control inflation
. its imports are huge when compared to exports. This factor along with recession in all other sectors. With its value of rupee Rs. uncut precious stones. it has one of the largest appetites in the world. is causing the mighty US dollar to shake. 3935 now instead of Rs. 48. fertilizers. During the periods when the dollar was moving high against the rupee. Thereafter. With the same scenario as given for export. iron and steel. 39.
So now it depends on what the future has to reveal for. made foreign investment in India very attractive. foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special circumstances. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate Conclusively. is no longer a million dollar question. With the recent liberalized norms on foreign investment policy like ± Foreign investment of up to 51% equity limit in high priority industries. on the other. but a million Rupee question!
. allowing free usage of export earnings to exporters. how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. On one hand the rupee appreciation will affect exporters. rupee depreciation will affect importers.. etc. appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. Can the Dollar remain king or not.Foreign investment into India is also contributing well to dollar depreciation against dollar. BPOs.