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The Rupee rise: Who gains, who loses
Prasanna D Zore in Mumbai | September 25, 2007 09:37 IST
First, the hard facts. The Indian Rupee hit a 9-year high against the mighty dollar on September 21. The Indian currency closed at 39.90/91 a tad below its intra-day high of 39.85 to a dollar. Simply put, you could now buy one US dollar for only Rs 39.91. A few years back, the same US dollar was available for more than Rs 44.
While a host of factors can be held responsible for this development, the major boost was the US Federal Reserve Chairman's 50 basis point cut in the Fed rates. As interest rates of any economy decrease, the value of its currency against other currencies also decreases. This is the general principle of economics. Drop in interest rates makes a currency less sought after as the returns decrease. Hence investors move out of that particular country in search of higher returns.
Importantly, for India as more and more foreign institutional investors (FIIs) started pumping dollars into the Indian economy the value of the Indian rupee soared. Experts speculate that soon Indians will be able to buy one US dollar for as less as Rs 37. While this may prove a boon for some, others will be equally hurt by this exchange rate.
Who benefits, who doesn't?
Here's who will benefit and who will get hurt because of the soaring Indian rupee. Every exporter having a major part of his income in dollar receivables, will be hurt by the appreciating rupee. Earlier, if he got Rs 41 for every dollar that he earned, he will now receive only Rs 39 (let's assume for simplicity). That is, a loss of Rs 2 for every dollar earned.
Imagine the condition of exporters having millions of dollars in receivables. Indian IT companies (those who have not hedged their dollar receivables adequately or efficiently), textile companies, auto component manufacturers, Indian BPOs will all have a tough time if the Indian rupee continues with its upward journey.
For travellers and students happy days are here again. One section of Indians, and a huge one if recent reports on number of Indians taking vacations abroad are true, will be cheering the rupee's sudden strength. Students and travellers going abroad (especially to the US) will have to spend lesser rupees for every dollar that they purchase for their vacation or stay abroad. The rates of international tickets will come down as the cost of aviation turbine fuel drops and students going to US universities pay less as tuition fees.
Advantage India, a big oil importer. India imports 70-75 percent of its oil requirement. Even if the cost of oil per barrel has hit a record high of $84 in recent times, the appreciating rupee definitely helps to soothen the harshness of oil price increase. As India pays in dollars for its oil imports, the cost lowers significantly even as the rupee gains in strength. If at $84 to a barrel India would pay Rs 3, 444 (assuming a dollar rupee rate of Rs 41 for simplicity) for every barrel, at Rs 39.91 India will have to pay only Rs 3,352 for every barrel, a gain of Rs 91.
The rupee rise also helps to tame inflation, India not only imports oil but a number of other things. Even wheat imports were in the news recently for all the wrong reasons.