Impact Of Falling Rupee – Free PDF Download

INTRODUCTION

• The Indian rupee has crashed past the 72-mark against US dollar and continues to be on a roller coaster ride.
• The sudden fall has caught the government and central bank off-guard.
• In economic analysis no phenomenon has a singular outcome in terms of effects.
• Exports
• Balance of trade
• Inflation
• Interest rate
• Companies with forex exposure

EXPORTS

• Weaker rupee helps exports to grow.
• Depreciation leads to more EXPORTS.
• However, for it to work, there are 2 caveats-
• First, the elasticity of exports with respect to price must be high.
• Meaning thereby that when prices fall, demand for Indian exports increase.
• But most of the goods that India export have fairly inelastic demand like chemicals, textiles, handicrafts, agri products, etc.
• Second, the link between depreciation and exports to really get established, rupee must weaken in a dominant manner.
• The rate of depreciation is still lower than that of the currencies in Latin America, Africa, Turkey, China.
• It is only the East Asian economies that have withstood the free fall of currencies vis-a-vis the dollar.

BALANCE OF TRADE

• Our imports are always higher than exports.
• Thus the net impact on trade balance is always negative in rupee terms.
• The import bill on oil increases sharply.

INFLATION

• As a fallout of this phenomenon, the pressure on prices in India would be higher.
• Take the example of crude oil– Whenever rupee weakens, the oil prices in India goes up.
• This trickle down to other products such as machinery, electronics, consumer products etc.

INTEREST RATE

• As inflation rises, the Reserve Bank of India (RBI) will be flagging inflation concerns.
• This will compel the RBI to increase the repo rate, so that inflation remains b/w 2% – 6%
• That’s why RBI keep intervening in currency market. (explained in my last video)

COMPANIES WITH FOREX EXPOSURE

• Companies which have forex exposure will have to make provision for higher costs or losses in the absence of hedged positions.
• This may hamper the growth of businesses.
• Exports
• Balance of trade
• Inflation
• Interest rate
• Companies with forex exposure

SO WHAT INDIA SHOULD DO?

• As economic survey mentioned, India must move towards export driven economy.
• Import substitution should be given importance.
• Make in India must succeed to take the benefit of falling rupee.

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