Tuesday, November 22, 2011

Is the Indian Currency Rupee Depreciation against the US Dollar Good or Bad?


All of us who read news would’ve seen the fact that the exchange rate between the Indian Rupee and the US Dollar has gone over the roof. In 2009 – 2010 the exchange rate was hovering around the 43 – 45 rupees per US Dollar level. Over the past one year, the rupee has consistently depreciated against the dollar with the last quarter of 2011 (calendar) being one of the worst in terms of Rupee Value Depreciation. The US Dollar is currently worth over Rs. 52.50 (as of this writing on 22-Nov-11 evening) and experts expect it go up.

The purpose of this post is to:
1. Understand why this happened in the first place
2. What this means for us – Is this Good News or Bad News?

So, lets get started!!!

Why would the Rupee Depreciate against the US Dollar?

Well, this is not something that can be answered in a single sentence. But to give an overall picture without getting into the deeper details, the reason would be:
“Exchange Rate is nothing but the price of a Currency in the International Market. If the demand for the dollar is higher than its supply, the Rupee should depreciate. If it is the other way round, it should appreciate”

The Key reason for this would be the global economic scenario. The economic situation, world over is very volatile. People are worried about the safety of their investments. Because of risk aversion on the part of people, US Dollar regained its place as a Safe Haven. People still believe that the US Dollar is much safer than any other currency in the world and hence are accumulating the US Dollar. This effectively means that, the demand for the Dollar is going up which essentially means the price of other currencies (Exchange Rate) may be affected.

Why did the Rupee Depreciate so much?

As suggested in the previous paragraph, the availability or rather the supply of the US Dollar in the Indian markets is pretty limited. Because of uncertainty in the global economic scenario, foreign investors (especially from USA) have turned net-sellers and USD Inflows into the country has fallen sharply. The US dollars into the Indian economy by the FII’s (Foreign Institutional Investors) not only guides the movement of the Indian Stock Markets, it also is a potent force that can determine the exchange rate movement of the Indian Rupee. The synopsis of this FII situation is as follows:
“If there is a net inflow of money (USD) from FII’s the rupee strengthens or appreciates against the US Dollar. When there are net outflows, it depreciates“

For Example: During 2010, there were record inflows of funds from FII’s into the Indian system and hence the Rupee was very strong. Remember the days when the Rupee was around 42-43 rupees per US Dollar??? Now in 2011, FII’s are withdrawing their funds and hence the value of the rupee is depreciating.

Is this Good News or Bad News?

Well, the answer is differnet depending on who you are.

Good News If:

1. You are an IT company like Infosys or TCS. Most of your revenue comes from USA and is in US Dollars. So, if the Rupee Depreciates, you earn more in terms of Indian Rupees even though, the US Dollar amount you get paid is the same.
2. You are someone working in United States of America. You send money to India for your family or investment. So, you are going to get more rupees for the same amount. For example, if you send USD 1000 every month to your parents, the would have got around Rs. 45000/- every month last year and now they will get Rs. 52000/-
3. You are a Manufacturer who exports stuff to USA or any other foreign country and get paid in US Dollars. (Reason, same as mentioned in the above two points)

Bad News If:

1. You are an Oil Company like Indian Oil or Bharat Petroleum. Since the price of oil is determined on a per barrel basis in USD, for the same barrel of oil, you end up paying more in terms of rupees
2. You are a manufacturer who imports stuff from other countries for your manufacturing. Not all stuff you want for your production is available in India. If your work has importing stuff from abroad, you might incur extra expenses in procuring the stuff you want

What’s the Verdict?

On the whole, this is more Bad News for the General Public. The price of oil and other materials which are imported from foreign countries are going to go up. This essentially means that Petrol, Diesel and other items are going to cost more. Already Petrol has crossed the Rs. 70/- mark per litre and the rupee depreciation may affect the situation further and drive the prices of petrol & diesel even further. This will mean that all items like vegetables, fruits, any and all items that are transported from one place to another before they are sold will get costlier. The cost of moving stuff from place to place is going to go up and the manufacturer/producer is going to pass on the extra cost to the end customer – “You and Me”. So, as a whole this is
REALLY BAD NEWS!!!!

Note: You might have a lot of questions about the Rupee Depreciation. So, if you have any, feel free to drop a comment and I will include the answer to your question in the next post, which is going to be about the various questions about the Rupee Depreciation…

37 comments:

  1. If investors take out their investment from European countries to invest in US, would it have any effect on the exchange rate of rupee?

    Thanks in advance:)

    ReplyDelete
  2. 1. What do you think the maximum value to which the rupee may fall?
    2. What do you think the rupee will be worth against the dollar by mid or end of 2012?

    Thanks.

    ReplyDelete
  3. Very well explained.. thank you! regards saba

    ReplyDelete
  4. very well explained.. thank you!

    ReplyDelete
  5. if it is really a bad news, then what RBI can do to come out of this situation and what it is really doing?

    ReplyDelete
  6. @ Komal

    Check out the next post. Your question is answered there.

    http://anandvijayakumar.blogspot.com/2011/11/indian-rupee-depreciation-against-us.html

    ReplyDelete
  7. Since 2005 Rupee value, in case of buying power inside country went down(100 vs. 1000). Do you think correction happening due to that will reflect with world currencies against ours?


    Thanks in Advance

    ReplyDelete
  8. @ Anonymous

    Inflation or the buying power of individuals in a country does not affect the country's currency value against other currencies.

    ReplyDelete
  9. What is wrong with India Foreign investment policy that this is happening suddenly . If the answer is "the investors are being precautionary due to global slow down , hence the ruppee is depreciating " . Then the same thing should happen to China . RMB is not affected so much .

    ReplyDelete
  10. What are the implications of Rupee devaluation on manufacturing sector?

    ReplyDelete
  11. what is precisely meant by net-sellers in context to currency???
    Thanks for the very useful piece of writing...hope u will ans this ques of mine as well...thanks

    ReplyDelete
  12. @ HellSeeker

    Net Sellers means there are more people selling than buying. For any trade to happen there must be two parties a buyer and seller. Net Sellers means there are more sellers than there are buyers

    ReplyDelete
  13. @Murali

    The problem is because:
    1. China is not as big an investment destination like India
    2. China has more USD Reserves than the rest of the world put together. So, their currency cannot go down much against the US Dollar

    ReplyDelete
  14. @ Anonymous

    Manufacturing companies that import stuff from outside India will see big impact to their margins due to the rising dollar.

    Manufacturing cos that export stuff to other countries will see good hikes in profits.

    ReplyDelete
  15. what is the effect of rupee value depreciation on our stock markets...

    ReplyDelete
  16. what is the effect of rupee value depreciation on our stock markets...

    ReplyDelete
  17. @ Suresh

    The rupee devaluation will not have a direct impact on the stock markets. However, it will cause panic and negative investor sentiment which may cause the market to fall

    Anand

    ReplyDelete
  18. can u explain how the Indian rupee value are being fixed against dollar or some other currency like Euro. How thy r fixing against oil price,
    it will be very helpful for me ?

    ReplyDelete
  19. can u explain how the Indian rupee value are being fixed against dollar or some other currency like Euro. How thy r fixing against oil price,
    it will be very helpful for me ?

    ReplyDelete
  20. @ Valli

    The topic on how price of two currencies are set is very large and I will probably write a seperate post for it.

    In short, it is set based on how much foreign exchange reserves, gold reserves, loans etc a country has when compared to the other.

    ReplyDelete
  21. howz d problem goin' to be solved as in USD will always remain a sfest currency in the world?

    ReplyDelete
  22. @ Shubham

    Sorry, I couldnt understand the question clearly.

    But, the USD will remain the most preferred/sought after currency for atleast a few more years...

    Anand

    ReplyDelete
  23. Is there a way or signs to watch out for when this devaluation will go more or start reversals?

    ReplyDelete
  24. @ Deven

    Unfortunately No. We cannot predict this change;

    However if the Eurozone crisis worsens or the world economy worsens then we can expect further depreciation or volatility

    ReplyDelete
  25. Indian currency is falling because of Un-co-ordinated Controle & information within RBI. No suggestive & controlled steps taken by RBI on the matter.Leading & Sr. Indian Economists are offered Jobs in UN therefore Lack of suggestive Experienced Hands within GOI.

    Take the case of currency of South Africa & P.R. China , the factor of change is very small in last 4-5 years.Whereas our Indian Rupee have depreciated without any parametric controle.
    Our Economist & GOI must learn lessons from South Africa & P.R.China .

    ReplyDelete
    Replies
    1. That is because China is explicitly doing all it can to maintain the value of its currenc against the US dollar. the RBI and the Indian government do not control the price of the rupee that much.

      Delete
  26. Hello Anand,

    After reading your article, the concept of depreciation of rupee has become crystal clear.
    Thank you so much!

    You are a good teacher!

    ReplyDelete
  27. hello anand,
    your article is really helpfull
    thank you and keep writing

    ReplyDelete
  28. will or can rupee ever get at par with USD?

    ReplyDelete
    Replies
    1. In the next 15-20 years I don't think so.

      In future maybe after 75 or 100 years quite possible but realistically speaking may not happen

      Delete
  29. Thanks a lot..
    You really have a great understanding of this subject..

    ReplyDelete
  30. Hello Anand Sir, If a media company(internet media) makes 150 Million USD (Google Adsense), will that increase or decrease INR? I mean when we bring in USd and get them converted, does that help in increasing INR value? Is there a chance for bloggers, IT people to increase the INR value. Kindly let me know. Thanks.

    ReplyDelete
    Replies
    1. Rakesh - Google Adsense's revenue is not only for India. in fact bloggers from India who earn a revenue using adsense are bringing in USD revenue to the country. However, the amount brought in is just like a drop in the ocean and will not have any significant impact on the falling INR value.

      Check out this article - http://anandvijayakumar.blogspot.com/2011/11/indian-rupee-depreciation-against-us.html which explains what can be done to stem the fall of the rupee. It is not impossible to save the rupee but requires weeks and months of dedicated steps...

      Click Here to read that article.

      Anand

      Delete
  31. hello sir what u think what will be the us dollars to indian ru. exchange rate in march 2o14 and y

    ReplyDelete
  32. hello sir ,what u thhink what will be the us dollars to indian ru.exchange rate in march 2o14 any y

    ReplyDelete
    Replies
    1. Anonymous - Predicting the value of the rupee 6 months down the line is very difficult. There are numerous factors like - what happens with the US economy, elections in 2014 in India etc.

      As of now, my prediction is that the rupee will not go up or down beyond 2 rupees.

      Anand

      Delete

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