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INTRODUCTION There is a lot of focus in India on the rupee dollar rate and on RBIs foreign exchange reserves, as measured

in dollars. However, the dollar is not a stable yardstick. The dollar has itself been fluctuating quite a bit. An Exchange Rate is the rate at which one nation's currency can be exchanged for that of
another. Exchange rates impact, and are impacted by, international trade, in a free-market system that helps to maintain a balance of trade and balance of capital. For example, a skewed change rate can make a company's exports cheaper than their foreign counterparts, but for a country to achieve this artificially they must sell their own currency by borrowing against the nation's wealth to purchase another nation's currency. If exports or all capital are in high demand, a country's currency will rise in value because of the demand for that currency to pay for exported goods, services, and capital. Investors are impacted in two ways: 1. Businesses that rely on exports can find their products suddenly competitive - or prohibitively expensive - in overseas markets as exchange rates fluctuate. Similarly, companies that rely on imports can see the costs of these imports rise and fall with the exchange rate. For companies impacted by changes in U.S. Dollar exchange rates, see The Dollar. 2. Exchange rates directly affect the realized return on an investment portfolio with overseas holdings. If you own stock in a foreign company and the local currency goes up 10%, the value of your investment goes up 10% even if the stock price doesn't change at all

Factors drive the demand for a currency They are:


Interest Rate: A demand for a currency is hugely dependent on the interest rate differential between two countries. A country like India where int. rate is around 7-8% experiences greater capital inflow as investors get better return than what they might get in US. (with Interest rates of 2-3%). This results into rupee appreciation. Inflation Rate: The demand for a countrys goods & services by the foreign buyers would be more if the inflation rate is lower in that country compared to other countries. Higher demand for goods & services would mean higher demand for that currency resulting in the appreciation of that currency. For instance if Indias inflation rate is lower than that of Zimbabwe then the demand for our goods, services and currency would be higher than that for Zimbabwes. Export-Import: If a country is exporting more than its imports from other countries, then this would mean higher demand for that currency, causing appreciation of that currency against others. Trading in currencies in the Forex market: The exchange rate fluctuates minute by minute because of speculative trading in the Forex market. Though trading in Forex market causes fluctuations in the exchange rate, over a period the change is backed by the fundamental factors like the growth potential in the economy, interest rate differential and the inflation rate existing in different countries. In a manage floating exchange rate system like India the government purchases rupee in exchange for the foreign currency to increase money supply in the economy which leads to depreciation of the

home currency. Conversely, it purchases foreign currency in exchange for rupee to reduce the money supply in the economy leading to appreciation of the home currency.

Impact on economy Rupee appreciation makes imports cheaper and exports more expensive. According to intelligence reports by the Associated Chambers of Commerce and Industry of India, sectors like petroleum and petroleum products, drugs and pharmaceuticals and engineering goods which have import inputs of as much as 77 percent, 19 percent and 21 percent, respectively will gain if the rupee appreciates. They would have to pay less for the imported raw materials which would increase their profit margins. Likewise, a depreciating rupee makes exports cheaper and imports expensive. So, it is good news for industries such as IT, textiles, hotels and tourism which generate income mainly from exporting their products or services. Rupee depreciation makes Indian goods and services cheaper for overseas buyers, thus leading to increases in demand and higher revenue generation. The foreign tourists would find it cost effective to come to India, therefore increasing the business of hotel, tours and travel companies.

Indias IT sector is dependent on foreign clients, especially the United States, for more than 70 percent of its revenue. When an IT company gets a project from a client, it pre-decides on the length of the contract and the cost of the project. The contracts with U.S. clients are usually quoted in U.S. dollar terms. So, the fluctuation in the exchange rate can bring about a considerable difference in the performance of a company.

Some companies undertake a range of measures like hedging exchange risks using forwards and futures contracts. This helps in mitigating some of the losses due to exchange rate fluctuations, but none-the-less the impact is substantial.

The exchange rate is a significant tool that can be used to examine many key industries; with fluctuations potentially having a serious impact on the economy, industries, companies, and foreign investors. Rupee appreciation is generally helpful for industries which rely closely on imported inputs while depreciation of the rupee is welcome news for industries which are exporting a majority of their products.

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. However, this could not last long because the oil price rise in the 1970s and 80s created a big gap in Indias balance of payment. 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, in our case India and rest of the world. This gap widened during Iraqs attempt to take over Kuwait. Thereafter, 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. Exporters 2. Importers 3. Foreign investors Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the worlds largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48, was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike. Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like Foreign investment of up to 51% equity limit in high priority industries; 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; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. 1_Economy_website_corporatelivewire.pdf By Dezan Shira & Associates

Impact of flucatation of dollar vs rupess in 2011

2011 was the year of great stress for Indian Rupee. It has lost greater than 10 % of its value in the year 2011, making it one of the worst performing currencies in Asia. Logic says rupee appreciation shows the Indian economy is strengthening against US economy and depreciation makes the economy weaker. Overseas funds sold more than US$500 million worth of Indian-listed shares over the last 5 years, reducing net income for 2011 to less than US$300 million a tiny sum compared with record investments of greater than US$29 billion earned last year, on November 21, 2011 alone.

According to Federal Bank report, the premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points. The move was coordinated with the monetary authorities in Canada, the U.K, Japan and Switzerland and the Central Bank of Europe.

Below is the graphical representation of movement of Indian-Rupee with respect to US Dollar-

Role of Government of India and Reserve Bank of India(RBI) The exchange rate is a significant tool used to examine the efficiency of economy. The exchange rate of the Indian rupee is dependent upon the market conditions, where the demand and supply play a major role. In order to foster the effective exchange rates the RBI makes buy and sell transactions to keep the low variability and volatility in exchange rates. RBI also remove the excess liquidity from the economy by increasing the CRR and SLR. The Government of India also managed floating exchange rate mechanism. This means that the Indian government interferes only when the circumstances demand and/or if the exchange rate gets out of control by increasing or reducing the money supply.

Impact of rupee fall on Indian Economy

Rupee appreciation makes imports cheaper and exports more expensive. India's Total Imports and Exports statistics for the period 2010-12 are as followsActivity of Trade Imports Imports Exports Exports Period April-October 2010-11 April-October 2011-12 April-October 2010-11 April-October 2011-12 Time Period April-October 2010-11 April-October 2011-12 April-October 2010-11 April-October 2011-12 Amount US$210 billion US$275 billion US$124 billion US$180 billion 45.16% 30.95% Y-o-Y Growth (%)

According to intelligence reports by the Associated Chambers of Commerce and Industry of India, sectors of India Exports are as followsSector of Import Petroleum Heavy Engineering Goods Pharmaceuticals 77 22 19 Share in Total Imports

The sectors of Import gain if the rupee appreciates. They would have to pay less for the imported raw materials which would increase their profit margins. Likewise, depreciation in rupee value makes exports cheaper and imports expensive.

Benefits of Rupee Depreciation

Companies: Rupee depreciation is good for industries such as IT, textiles, hotels, technology, micro chips and tourism which generate income mainly from exporting their products or services. It makes goods and services from India, cheaper for overseas buyers, thus leads to increase in demand and higher income for Indians. Hospitality and Tourism: The foreigners who visit India for touring or business purpose would find it cost effective to come to India. This would increase the business opportunities for hotel, tours and travel companies. IT Sector: India generates more than 70% of its revenue for IT sector from USA. India's IT Sector is dependent on foreign clients. When an IT company gets a project from a client, it decides on the Time and costing of the project. A considerable difference in the performance of a company can be brought about due to the fluctuation in the exchange rate . Foreign Investors: Foreign investor invests in Indian market and even if its value doesnt change in 1 year, hell earn profit if rupee appreciates and make a loss if it depreciates. Export Boost: The depreciating rupee will boost the exports. The depreciation will benefit the India's IT Sector. The major players like TCS and Infosys can gain. Both these stocks have relevant weightage in the market index. The Indian market will be saved from big crashes.

Escape from Indian Rupee fluctuations Hedging: Using forwards and futures contracts help in mitigating the risks arise due to exchange rate fluctuations. This process is known as Hedging, but none-the-less the impact is substantial. Reduce Trade Deficit: The main factors for the depreciation of rupee are slowdown in capital flows, high trade and current account deficit and high crude oil prices. To stop fluctuations in rupee it is necessary to reduce these deficits. RBI Control Policy: When rupee depreciates, it results in a price hike in the petroleum products and fertilizers. This increases the inflation. This becomes a challenging period for RBI. If they increase the key rates, it will affect our growth rate and there will be stock market crash. If it is not, inflation will kill the normal public. As per analysts say the rupee depreciation is considered as a short term scenario. The Indian market will be a good destination for FIIs in years to come. Huge investment is expected in the coming years. Gradually the rupee will gain its value. Investors need not worry about the rupee depreciation.

Indias merchandise exports In the post-reform period, Indias merchandise exports witnessed unprecedented growth and contributed significantly towards the countrys overall economic development. In FY07, Indias merchandise exports contributed around 14% to its GDP; in terms of US dollars, it grew by 23% to US$155.5 billion in FY08. In fact, its merchandise exports grew at a CAGR of 24.9% between FY04-08. The chart given below indicates the trend of Indias merchandise exports in the past five years.\

Commodity group-wise export contribution In FY07, chemicals, engineering and minerals & metal product groups1 together contributed over 56.5% to the total merchandise exports, up from around 40.0% in FY03. This growth was largely due to chemicals and allied products, whose share in Indias merchandise exports shot up from 19.0% in FY03 to 27.9% at US$ 35.3 billion in FY07. Chemicals and pharmaceuticals, including petroleum products, formed the largest product group in Indias merchandise exports in FY07 and grew at a CAGR of 36.9% during FY03-07. While petroleum products contributed 52.6% of these exports, basic chemicals, pharmaceuticals and cosmetics together contributed around 29.6% of merchandise exports. In FY07, while the US accounted for 11.6% of the total organic chemicals exports, China was second with around 9.0%.

Engineering goods was the second-largest product group in Indias export basket in FY07 and contributed around 14.9% of the total merchandise exports at US$ 18.8 billion. Moreover as this sector grew at a CAGR of around 37.1% in the same period, it demonstrated Indias growing significance as an engineering outsourcing destination across the world, especially for transport equipment, which alone grew at a CAGR of 38.5% during FY03-08. In FY07, Indias IT-ITeS exports grew by 33% to US$ 31.8 billion against the previous year and contributed a major share towards Indias service exports. While IT services accounted for around 57.5% of the IT-ITeS exports, ITeS-BPO accounted for 26.8% and engineering services and R&D, software products accounted for the rest. 1_Economy_website_corporatelivewire.pdf By Dezan Shira & Associates research paper

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