IMPACT OF FALL OF RUPEE VALUE

Rise and fall of rupee vs. dollar have positive and negative impact on each and every part of society and economy.  On 24 May 2012, Indian rupee have depreciated to 55.62 against dollar, the lowest ever in history. The depreciation of Indian rupee against foreign currency especially dollar is not a good news for Indian economy and society. A depreciating rupee lead to macroeconomic problems such as prices for imported goods, rise of oil prices and many other.

Graph shows the trend of Indian rupee to dollar conversion:

Image

Let us look how Indian rupee depreciation effects certain section of Indian economy and society:

a)      Exporters:

The fall in Indian rupee benefit exporter the most because they get more amount of local currency for same unit of dollars even though the trade quantities are same. Exporters in order to have more profits, are booking forward contracts and then cancelling it and again booking it at better rate. This will lead to further fall in rupee value.

b)      Import & Importers:

The fall in Indian rupee is a big blow for importers and rise in import bill.  Indian importers have to pay more in term of rupees for procuring their raw material or product and also for availing the service from outside agency. Companies with foreign debt are also adversely affected, they need to pay more rupees to repay their loans. Rupee depreciation will increase the debt burden and lower the profit of the company. As import became costlier, the prices of  the key commodities such as oil, coal, mineral etc  also increases.

c)       Foreign and Indian Investors:

Local investor should stay away from companies with high foreign debt as this will lead to severe loss for the investors. Foreign investors will also have to bear loss due to rupee depreciation. If foreign investor deposits $100 at an exchange rate of 1USD = Rs.50, then it can buy stock worth Rs. 5000, if the rupee depreciates to 55.62 then on sale of stock foreign investor will get Rs. 5000/- but on conversion to dollar terms , it will be a loss.

d)      Indian students studying abroad:

Indian student those who are planning to study abroad have to pay more in rupee terms for courses, stay and other expenses.

e)      Consumers:

Rupee depreciation also increases load on consumers. As import became costlier, prices of oil increases which in turn lead to increase in transportation cost and thus consumer commodities also increases. Consumers will also have to pay more for services offered by Indian companies.

f)       Fiscal deficit:

Increasing imports over exports lead to increase in imbalance of trade that severely impacts country’s fiscal deficit.

g)      Indian companies that have borrowed in USD:

It could be a big problem because lot of Indian companies borrow foreign currency to take advantage of the low interest rate. Now, they have to spend a lot more Indian rupees to buy the same level of US dollar they borrowed and this will not only nullify the interest rate savings but also will put a big dent on their resources.

Looking at the current economic outlook, the currency crises seems to stay for a much longer period. However, a structuring of Greek debt coupled with higher inflows from FII’s can lead to an arrest in the falling rupee.

Source of graph:

http://www.x-rates.com/d/INR/USD/graph30.html

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5 thoughts on “IMPACT OF FALL OF RUPEE VALUE

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