Reasons & Results of falling Rupee

The recent devaluation of Yuan has led to weakness in rupee against dollar. In 2013, the rupee had touched an all time low of 68.85 intra-day trades and today (24.08.2015) it has touched 66.60 a USD. So far, it is the result of  devaluation of Chinese currency but what will happen when  U.S. Fed start hiking the interest rates and/or oil companies the world over start remitting  billions of dollars to Iran as a consequence of lifting of UN sanctions on Iran.  This would lead to an outflow of foreign funds from the emerging markets and India will not be an exception.

Let us analyse the reasons and results of falling rupee in Indian context.

In currency market rupee is a commodity  whose price   is the corollary  of demand and supply. In the present circumstances,  dollar is in more demand vis-à-vis the rupee.  

Reasons

There is a very big Giant in international market called Foreign Institutional Investor (FII). It keeps on moving from one economy to another in search of maximum gain. In 2008, when US and European economies were in shambles, the FIIs moved to Indian (and Chinese) economy, thus projecting a distorted image of strong rupee and higher index. India became complacent that its economy was stronger than US economy, thus   remaining under delusion   that   as per law of Mother Nature cycle, India would become the super power with no place for US to exist on this planet.

But keeping a giant at home is not devoid of inherent risk. The money from abroad was , inter alia, invested in stocks and put in deposits with the banks .  The mere investment in secondary market has no positive impact for the economy to grow whereas investment in deposits   carries   cost.  Since money was in India, that period was a  big opportunity  to develop infrastructure and production environment ,after all , the paper currency derives its strength from the sound economy , viz, lower current account deficit, lower inflation, higher employment etc .  But Alas! The period coincided with platitude of scams, investigations and inertia of making any  decisions in the country. The government and the parliament had become practically defunct. The country was left to Almighty God. Thus Nature played its cardinal principal ‘Only  fittest will survive’.

Now that the US economy is on recovery path, the giant FII, after its sojourn in India  and  wolfing  the wealth of the country by way of interest, dividend etc,  is flying back to its home town, bigger and fatter.

Results

Let us analyze who is gainer from the falling rupee:-

Importer:-     Certainly not.

1. Every import is becoming costlier. Unless importer  is able to pass on the increased cost to the ultimate consumer, like oil companies, he is doomed  as his investment  in plant and machinery may go waste if he is dependent on imported raw material.

2. If importer has taken buyers’ credit for trade or capital goods and has not hedged the currency position under the impression of natural hedge, in case he happens to be an exporter as well, he is grossly mistaken and will get hurt.

3. Students who have gone to study abroad and have not taken hedge for the expenses abroad.

Exporter:-     Mainly not.

1. Exports which have already been made but proceeds still not realized- currency has already been booked. Exporters must be cursing themselves for not keeping the position open.

2. Exports where contracts have already been signed but shipment not ready- they are severely  affected since:-

a. Currency hedging already been done, thus not able to enjoy the fruits of falling rupee.

b. The cost of raw material for shipment  has gone up due to rising inflation, an upshot   of devaluation of currency.

It is said that  ‘Man is born free, but he is in chains everywhere’.  The exporters in this situation are  chained to their extremities. In case they feel that exports at the contracted rates have become unviable, they   cannot   rescind the contract warranting  penalty clause and the exchange loss since currency already booked.

3. Exports which are to be made in future – the overseas importer is diligent and clever enough, he understands the exchange value of dollar to rupee and bargains tough to squeeze the entire benefit from the Indian exporter on exchange front. Poor Indian exporter would curse himself  having born in India.

Consequences

The major end result of falling home currency is inflation and who are the people affected due to inflation:-

-  Upper  Class  -  No.  They have sufficient cushion to       withstand  any jerk.

-  Lower  Class  -  No.   Since their main requirement FOOD is  assured by Food Security Bill.

-  Middle  Class  - Poor Fellow, why are you born on this earth!. You have no personality of your  own- neither Upper Class  nor lower class.  You don’t  have any  right to exist. Your extinction is imminent.
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

    Tilak Gulati is Assistant General Manager at UCO Bank.

    visit me: www.itstrgulati.blogspot.in

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