35. Appreciation of the Indian rupee and its impact on the Indian economy.

Appreciation of Indian Rupee to hit Global Economy? A Million Dollar Question

--By P Neelakantha Achary

There is good saying - a million dollar question, probably the usage of the saying might change in near future to - a million rupees question. Certainly, this might happen if more analyses are made on the devaluation of dollar and appreciation of Indian rupees. Within a span of 12 months, the value of dollar has significantly dropped from around 47 to 48 rupees to around 39 rupees. Of late, the value of 1 US dollar is around 39 rupees.

Indian economy is among the fastest growing economies of the world. The appreciation of the rupees against the dollar would be another giant sign towards its economic prosperity and augmentation. However, the economic epidemics like poverty, unemployment etc., could not be dealt in the short-run.

The appreciation of the rupees will help the economy in many ways. There will be positive impact on importers and negative impact on the exporters. Let’s evaluate the possible impact of the devaluation of dollar and appreciation of rupees on the export & import in India. The dollar has been the popular medium of foreign exchange for a long time. Most of the payment for the export or import is made through dollar.

The devaluation of the dollar will have a positive impact on the importers, while it will have adverse effect on the exporters. Importers of goods and services will be getting the goods and services by paying less, as they used to pay 47 rupees against one dollar, now they will be paying around 39 to import the same. The exporter will be getting their return in dollar at the cost of 39 rupees per 1 US dollar, whereas they used to get around 47 rupees against one dollar. The difference in the previous and present exchange would have high impact if the volume of exchange is in millions of rupees or dollars.

In the past one year, the dollar has dropped by around 20 per cent against Indian rupees. This reveals that positive or negative impact on volume of export or import would be around 20 per cent, which can not be over looked as the exporters are suffering losses, whereas importer are on gain. However the impact will remain until there is depreciation of dollar against rupees. If it continues, then a great change can be expected on a long run in international trade arena. Another impact would be the fantasy of dollar has been losing ground day by day.

Analyses made it clear that earlier people were fascinate about dollar due to its value against Indian rupees. But the scenario has completely changed. Those, who were planning to move to US for job, now might plan to settle in Britain, as British economy is one of the strongest economies in the world.

The appreciation of the rupees will have a positive impact, whereas in the global economy the Yen, Euro and other currencies would find place in the foreign exchange race. At the international level, the sliding dollar will have huge impact as it is the global player despite all the hiccups. Finally it would worthwhile to say - depreciation of dollar: a million rupees question.

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The other side of Rupee appreciation

THE RUPEE’S (INR) appreciation during the last six months or so has taken the wind out of India’s corporate sails. INR has appreciated by nearly 9% against the US dollar (USD) in the past six months and approximately 6% against the British pound (GBP) and about 5% against the Euro (EUR). All exporters, especially IT companies, have been severely hit by the appreciation of the INR. On the other hand, currencies of Taiwan and Hong Kong are depreciating, posing a problem to Indian exporters in the global market. IT and the services industry will lose its competitive advantage if the currencies of their major global competitors do not appreciate as much as the INR. The Rs. 1,400 crore package announced by the government to mitigate the hit taken by Indian exporters is just not enough to heal the wound.

But there is another side to the story. Certain sections of the economy are welcoming the appreciation. This is because of the following key reasons:

Firstly, the IT industry which is strongly lobbying against the appreciation of the INR should realize that its phenomenal growth during the last decade is partly because of INR depreciation too. INR depreciated by almost 100 percent against the USD from a level of 25 in 1992 to 48 in 2003. Further, Indian economy needs development of infrastructure which warrants huge investments. A big chunk of the said investments must come from overseas. The host country’s currency, viz., INR, must appreciate to instill confidence into overseas investors.

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How a rising rupee can make you rich



LINKS to important reports

REPORT 1

REPORT 2

REPORT 3

REPORT 4