Now an arbit article

Feeling bored, but not sad enough to write a poem. Thought of writing something. But i think i am hit by a bad case of writer's block. Can't write anything to save my life. So thought i'll post some article which i had written a long time ago ( actually 3 months ago), as a part of the interview process for the finance club @ IIMC. The standard of the article is sooo poor, well u know the result. I didn't get thru. Here i am left with no club, no CV points ( and u thought that there are ppl in the clubs just because they are interested in it), and a miserable and a disgusting life (according to my CV at least). The article is called Rupee appreciation and i am posting what i had written then as is. I'll later try and do some research(if time permits) and write an article on the same thing (again if the time permits).

Rupee appreciation: A boon or a bane

Indian rupee is on a role. From the end of February 2007, the rupee has seen an appreciation run. From somewhere around Rs 44.9 per dollar at the end of February 2007, it stands at Rs 40.5 per dollar today, a whopping 9.8% appreciation in a span of just around 4 months. Now what is the impact of this on the Indian market and particularly on an Indian exporter? This write up is a small attempt to look into these factors.

Now what can be the reason for this rise in the rupee price? One important reason will be the need of the hour to curb inflation. During the month of February to April 2007, India witnessed an inflation of about 6 – 6.5%. To get a hold on this, the Reserve Bank of India would have left the rupee to appreciate. What happens when the rupee appreciates and how does it help to curb inflation? The answer is simple. Most of out inward and the outward trades are conducted in dollars. Now if the rupee appreciates, we will be paying lesser amount for the same good. For example, assume we will be buying some good X at $10 per piece say. So at the older rupee rate, we would have had to pay around Rs 449 for that. With the appreciated rupee rate, we will be paying only around Rs 405 for that. Since we are paying less for the goods we are importing, we will be selling it for lesser. Thus selling the good at lower prices will bring down the inflation.

But there is a flop side to this too and that is in the exports. Since the rupee value per dollar has gone down, we will be paid virtually less for the goods and services that we export. Now if the profit margin is not high enough to start with, the exporters will start to suffer. The services industry has already started raising voices about this. Since services is a highly competitive market, they will be operating with a very small profit margin and hence the reason for their concern.

Another flop side to this will be that, in order to get back the same price which they were getting earlier, the exporters will have to start hiking up their rates. But there are other competing countries out there like China, whose currency value hasn’t changed and thus would still be charging the same. This will lead to a loss of opportunity for the Indian exporters.

One way to hedge against this will be if you import and export at the same time. If you import the raw material and export the finished goods and vice-versa, then the effect of currency appreciation and depreciation will virtually cancel out and you will end up earning the same amount. An example in case will be the diamond industry, which will import the uncut diamond and exports the finished jewellery. But in sectors like software services, it is difficult to import and export at the same time and they are the ones who will feel most of the pinch.

So, in conclusion the appreciating value of the rupee is both a boon and a bane. It is a boon in the sense that it will bring down the import price of important goods like petroleum (which incidentally was thought to be one of the contributors for inflation) and help in curbing the inflation. But it will also affect the export sector in that the value for the goods and services which we offer will be significantly lesser and the way to hedge from all these is by both importing and exporting at the same time.

-Arun