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…