Effect of India Rupee Appreciation / Depreciation on Economy

Author: admin | Date: May 22, 2012

US Dollar vs Indian Rupee

These days Indian Rupee is daily hitting new all-time lows against the US Dollar, mainly due to Europe’s debt crisis and several domestic problems including India’s widening trade and current account deficits and declining foreign fund inflows.

Today rupee crossed 55 mark and is trading around 55.20 levels per US Dollar, creating a new all time low.

Let’s see how does this depreciation of Indian Rupee against the US Dollar affect our Economy.

Depreciation in rupee makes exports cheaper and imports expensive.

So the 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 (As per report of  Associated Chambers of Commerce and Industry of India) will see a severe dent on their income due to depreciation of rupee, as they would have to pay more for the imported raw materials which would decrease their profit margins.

Rupee depreciation not only increases the import bill of the country, but it also severely affects the cost of borrowings for the corporate sector.

Corporates have been increasingly tapping overseas loans—mostly in the US currency—to save costs arising out of higher interest rates and liquidity constraints in the domestic market in the recent months, but the falling value of rupee seems to have negated these benefits.

On other hand, sectors like IT, textiles, hotels and tourism which generate income mainly from exporting their products or services would gain from depreciating rupee as they would receive more money for the exported goods and services which would increase their profit margin.

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.

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.

On other hand, a appreciating rupee is helpful for industries which rely closely on imported inputs, and a bad news for exporters.

But since India’s Imports are more than its exports (70% Import – 30% Export) so a appreciating rupee is always beneficial for the overall economy.

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