by Pradeep Garg
MBA-IT 3rd Sem, IIIT-Allahabad
When ever a countryís currency appreciates conventional logic tells us that its economy is doing well. The rupee against dollar has appreciated from Rs 46 in July 06 levels to 39.23 levels in October 07, an increase of more than 10 % in last year.
Importance of exchange rates
Letís understand why appreciation of Rupee is so important for the economy. Recently Indian economy reached $1 Trillion mark. Letís understand this from Exchange rate perspective. If India Rupees is pegged at Rs 20 to $1 then Indian economy will be at $2 Trillion, at Rs 10 it will be $4 trillion, Rs 1 to $1 it will be at $40 trillion which is 3.5 times the US economy which stands at $12 trillion. This could translate into more per capita income and better consumption. This explains the level of importance of exchange rates.
Rupee Appreciation: The Reality
Post-reforms, it should be noted that the exchange rate of the Rupee was not purely market-driven, with the Reserve Bank of India constantly intervening in the forex markets to 'guide' itís value, to help Indian exporters maintain there competitiveness.
This is done by RBI through a complex calculation of benchmarking the value of the Rupee vis-ŗ-vis a host of currencies and taking into account their relative variations in their exchange rates across the globe and further adjusting it for other factors, such as inflation.So when we benchmark rupee against 36 currency composite index, it hasnít shown any significant appreciation. So we need a careful response to the rupee appreciation
|Effect on Importers and the exporters
So point comes out who is the gaining and who are facing the heat due the appreciation of rupee. In general the companies dependent on imports are benefiting and the ones dependent upon exports are the losing out.
IT an ITeS companies are the biggest losers from current wave as there products are billed in US Dollars (two third of Indian Business comes from US). Azim Premji said very relevant in this regard. He argued that exporters should increase there productivity to protect there margins but they need time to adjust. So government should support the exporters with duty cuts and waiving of some the custom duties.
Biggest gainers from this will be the Oil companies who are under great pressure due rising crude oil prices, the rising rupee is coming to there rescue.
According to an IOC official Ė
ďFor every 1 Re appreciation the input cost of crude dips by 2%Ē
Also it is helping to curb inflation as input costs in case of crude oils and electronics goods will decrease.
So where should we go
So where should we should we accept the strengthening of our currency or RBI should control it from appreciating further. On a whole currency appreciation was the necessary revaluation from our Rupee but at current levels it should not be allowed to appreciate further as the small exporters wonít be able to sustain the rupee onslaught.