Rupee Appreciation Boosting Indian Ecomomy
The underdog rupee has begun to flex it muscles. After nearly three decades, the rupee has appreciated 11% against the greenback i.e. US Dollar it has appreciated from 44.4 to 40.00 in just about 9 months and not only this it has also appreciated about 6% against a basket of major world currencies belonging to the US, the UK, Japan, Euro land & other major Asian economies.
Whenever the currency of a country appreciates, it is usually implicit that the economy is doing well and Indian economy is growing at a robust pace, with a growth rate averaging about 8½ percent is fueled by strong momentum in investment reflecting high capacity utilization, buoyant corporate profits, business confidence, and a rise in productivity.
Coming to the backdrop of rupee appreciation..
India’s bright economic prospects have driven inflows, which in turn have given rise to rupee appreciation and excess liquidity. Large capital inflows have propped up the country’s balance of payments, bridging the current account deficit. Capital inflows had reached a record US$45 billion in fiscal year 2006/07. In recent months, aided by a strong economy, India has become one of the favorite destinations for foreign investors.
Secondly, the interest rate in India is 2.5-3.5 percentage points above than that in US. Thus it is clearly profitable for the FIIs, & Foreign investors to borrow in US at 3% and invest in India at 6%.
The dollar’s fall is also primarily due to a big and rising current account deficit in US, which is not matched by capital inflows. FIIs and other investors are not keen to invest their money in the US with collapsing interest rates and instable stock markets. A strong possibility of US recession is on cards.
Finally, the government of India and the Reserve Bank of India in order to sustain the WPI based Inflation are restricting the flow of rupee in the market to control the excess liquidity and thus demand of rupee is increasing and advocating the appreciation.
Analyzing the impact of rupee appreciation it is a boon for the importers but a bane for the exporters.
Rupee does not seem to be gloomy at all for the importers. The rupee at 9 year high is a sigh of relief for importers in the country.
The Oil majors in India are already facing the volatility in the crude oil prices resulting in under recoveries. The rupee appreciation comes as a rescue for these companies to face the rise in the global prices which also solves the purpose of the government to curb inflation and hence the interest rates in the short term.
Also, one of the biggest beneficiaries of appreciation stands out to be the borrowers who have borrowed from the international banks or have sourced the funds from the foreign sources, an appreciation in rupee will reduce there external debts.
On the other hand, sectors like auto & aviation are also likely to gain from this appreciation.
On the contrary, given the fact, that major chunk of the export market is to the US. The exporters are already feeling the pinch of the rising rupee. Despite the rising rupee the exports have increased to $126 bn in fiscal year 2006-07 against $103 bn in the previous year but the profitability and the margins have been badly affected from reduced rupee realization. As a result textile, garments, electronics and chemical sectors had been hit hard. Indian companies may also loose their competitiveness in the pharmaceutical & sugar industries to the companies like China & Eastern Europe.
Another important consideration is the exchange rate policy of the competing countries. Since at this time the currencies of China and other East Asian countries are still virtually pegged to the dollar, suppliers from those nations will enjoy competitive advantage over Indian exporters.
However one area where Indian companies compete with the global developed markets which is also developing as an emerging market for software exports i.e. IT Industry which procures more than 60% of the revenues from the abroad & the US had been continuously lobbying against the rupee appreciation. Thus depreciation of dollar is emerging as the biggest risk for the Indian software and IT enabled companies.
In this Globalize & post liberalized environment the Indian economy and the financial markets will open up more and there would be a greater engagement with external markets, therefore increased inflow and the outflow of the capital will have a greater impact on the exchange rate of Rupee. Hence the economy has to be ready to face the short term spike as well.
The Exporters and the affected companies can also adopt the strategies to combat the rupee appreciation firstly by a wider use of hedging products like currency options should be made use of as it is impossible to predict exchange rate movements in the short run and also the exporters can move from dollar to euro invoicing which looks quite stable as of now.
We have thus seen rupee appreciation will perhaps create a more competitive economy, and it is also good for the economic health of our state, though its carries with it certain demerits but these demerits can be worked upon transformed into a blessing for the society.
