INSTITUTE OF MARKETING AND MANAGEMENT

Rupee Appreciation

A REPORT

SUBMITTED TO: Prof P.N Rath

Submitted By:

Jayesh Shah 07-II-724Lilly Jha 07-II-727Mehul Tyagi 07-II-730Munish Grover 07-II-733

Acknowledgment

It gives us immense pleasure to express our deepest gratitude towards our professor; we would like to express our sincere thanks to Prof P.N Rath, Institute of Marketing and Management. He helped us on the assignment work with the necessary inputs. His constant support has been the key to our achievement.

His ideas and additional insight helped us in refining our understanding of the subject, which resulted in the project being a personally rewarding success.

Lastly, we would also take a moment to express our heartfelt thanks to all our colleagues, team members, and members of the support functions who help us get along with the working ways of the project.

Group 10

Rupee appreciation – an overview

The value of international market currency decreases in terms of Indian currency or the other way round is called Rupee Appreciation.

Exact situation of Rupee Appreciation in International Market

In case of Dollar- Appreciation is more than 10% in last year.

In case of Euro - Appreciation is more than 6.9% in last year

In case of GBP - Appreciation is more than 8% in last year.

In case of Yen - Appreciation is more than 11.2% in last year

Whenever currency of a country moves up , it is usually implicit that the economy is doing well. The Indian rupee against dollar has appreciated from Rs. 46 in July, 2006 to Rs. 40.50 in May, 2007 to Rs. 39.80 in September, 2007.

The huge FII’s inflows in the country because of booming financial market, RBI allowing ECB borrowings till 2 billion dollars and FDI increase in various sectors led to over supply in Indian Forex market. Also, the crises in US mortgage sector have raised concerns over working of the US economy.

On the contrary rupee has depreciated against EURO and GBP, so it wont be prudent to say that the rise in rupee has been wholly on account of growth in the economy. It is also because of short term recession in U.S.

Source - Abhishek Arora , IBS – Hyderabad. Abhishek_indiabulls@yahoo.co.in

The Indian rupee had been allowed to appreciate against the dollar somewhat but it has been depreciating against other currencies and overall there has been no adverse impact. As part of the global adjustment, the rupee should appreciate further, and the monetary policy should subsequently be eased to cushion the impact of this. It should be India's longer-term objective to allow free flow of international capital — not within six months or even 18 months, but may be in five years rather than ten years. India should meanwhile build the institutional structures and mechanisms to ensure that the opening up of the capital market was of low risk and larger benefit to it.

India as also China have to play their due role in the major adjustments that the world would have to make to the very high U.S. current account deficit.

The "great strides" that India has made in developing the financial markets should be continued. But in this connection, India needs to do five things:

(a) It should enhance the underlying presumption that people should pay their debts, so that it does not any more take ten years for a debtor to pay his dues; (b) It should have a long-term objective of reducing the role of the government in the financial sector; (c) It should continue to encourage foreign financial institutions to enter the market — separate from capital control issues — as this helps development of the market; (d) the authorities need to worry about improving profitability of the financial sector, which is a prerequisite for its growth; (e) it should reduce the fiscal deficit which has been constraining the growth of the sector.

Source

THE HINDU

(Online edition of India's National Newspaper , date - Monday, Nov 24, 2003 )

Rupee Appreciation : Impact on Indian Economy

The rupee appreciation has already affected most industries, barring oil and gas, who have benefited from the same. Most companies especially from textile and IT are trying hard to find solutions to reduce the effect of rupee appreciation on their margins THE RUPEE’S (INR) appreciation during the last six months or so has taken the wind out of India’s corporate sails. INR has appreciated by nearly 9% against the US dollar (USD) in the past six months and approximately 6% against the British pound (GBP) and about 5% against the Euro (EUR). All exporters, especially IT companies, have been severely hit by the appreciation of the INR. On the other hand, currencies of Taiwan and Hong Kong are depreciating, posing a problem to Indian exporters in the global market. IT and the services industry will lose its competitive advantage if the currencies of their major global competitors do not appreciate as much as the INR. The Rs. 1,400 crore package announced by the government to mitigate the hit taken by Indian exporters is just not enough to heal the wound. But there is another side to the story. Certain sections of the economy are welcoming the appreciation. This is because of the following key reasons:

1. Firstly, the IT industry which is strongly lobbying against the appreciation of the INR should realize that its phenomenal growth during the last decade is partly because of INR depreciation too. INR depreciated by almost 100 percent against the USD from a level of 25 in 1992 to 48 in 2003. Further, Indian economy needs development of infrastructure which warrants huge investments. A big chunk of the said investments must come from overseas. The host country’s currency, viz., INR, must appreciate to instill confidence into overseas investors.

2. Secondly INR appreciation is welcomed by those companies with overseas borrowings. Significant levels of foreign currency – denominated, especially USD-denominated loans generate forex gains because of reduced interest payout occasioned by the rising INR. Companies like Ranbaxy and L&T have been able to generate forex gains in the last quarter because they have substantial exposure to ECBs.

3. Thirdly, major Indian stock indices are able to scale new peaks because of recent appreciation in the INR. It has been proved beyond any doubt that there is a very strong correlation between our stock indices and the parity value of the rupee vis-à-vis major currencies like the USD. Analysts point out that during the last year Sensex and INR exhibited a correlation of approximately 80% as against the 30 - 40% exhibited in the last three years. FII’s who have heavily invested in India are reluctant to sell off mainly because of the appreciating INR.

Lastly and most importantly, INR appreciation has helped control inflation. One of the reasons for softening of inflation during last few weeks may well have been the appreciation of INR. Therefore INR appreciation should be viewed in the broader context of its impact on the economy as a whole. The appreciation of the INR has helped in bringing down the country’s import bill particularly that of oil imports which easily accounts for more than a third of all imports. This in turn helps the country in bringing down the trade deficit. Industry will be able to source its inputs from abroad at a cheaper price and hence can export more. India Inc should learn to live with INR appreciation and try to exploit it to the hilt.

Positive affects

Beneficial for oil marketing companies(according to IOC official “For every 1 Re appreciation the input cost of crude dips by 2%”

The rising rupee will help the government to curb inflation, as the input cost of crude and electronic items will be lowered which will help in fighting the ongoing inflation and hence the interest rates.

Biggest beneficiaries of rising rupee stands out the borrowers who have borrowed from international banks. The companies like Tata steel, Mcdowell to name a few for their take-over plans of Corus and Whyte & Mackay .As on Dec.2006 the country has an external debt of $142.65 billion dollar so a 7% appreciation in dollar means the external debt is reduced to $132.66 billion

Negative effects

Exporters are feeling the pinch of rising rupee(given the fact that

Even if exports grow 20% this year, the appreciation of the currency is expected to result in a Rs 53,000 crore or $13 billion loss.

After , rupee appreciation will have the biggest impact on the exporters (exporters of meat, spices and textiles exporters followed by leather and gems & jewellery)

Construction sector is expected to have a moderate impact

Rupee appreciation has caused 11,000 people employed in textiles and garment industry jobless during March-June 2007.

The survey also reports that there is a considerable loss of business across sectors that depend more on imports for their raw materials.

Source : www. Go2webindia20.com 26 July 2007

Rupee Appreciation a setback for Indian Textile Industry:

Today after 9 month of duration, rupee is appreciating day by day and our exports is badly affected by it. The growth of manufacturing industry is dipped to nearly 7% from 11%, IT industry is also badly affected by this event but textile industry of India is worstly affected by it.

According to Federation of Indian Export Organisations (FIEO), the profitability of the exporters have been wiped out and constant appreciation of the rupee is threatening the competitiveness of

the Indian products. It also added that the competitors are just sitting on the fence to occupy the market.

Mr. G K Gupta president of FIEO stated that the downfall in exports is also affecting the industrial production, which has slipped from 13.2 per cent in July 2006 to 7.1 per cent in July this year.

In export sector maximum number of people are working and if same situation will continue these employed professionals will be badly hit and will be retrenched by the companies.

During festive season like diwali, garments,hosiery etc are always in huge demand but this year condition of this industry is worst than ever because of Rs appreciation. Companies based at Gurgaon are sending workers on 45 days’ leave without pay before the festival.

To protect their companies, Several producers are shifting their production base overseas. House of Pearls Chairman Deepak Seth said the company, which laid off 1,000 employees recently, was finding it better to manufacture in China, Indonesia, Vietnam and Bangladesh because of following reasons i.e shorter lead time, cheaper raw material and depreciated currency.

Nahar Industrial Enterprises Ltd. statement : There is a 10 to 12 per cent decline in the export realisation of fabric due to the rupee impact. Domestic prices are also depressed. We are, therefore, using it for in-house production,” .

According to (CITI) confederation of textile industry general secretory D.K.Nair : Our textile exporters are finding it difficult to compete in the price-sensitive international market as Asian competitors have experienced much lower rates of appreciation in their currencies.

Chinese Yuan has appreciated 4.6 per cent and on the other hand Pakistani Rupee and Bangladeshi Taka have depreciated by 1.4 and 0.43 per cent respectively. So Producers in countries like Vietnam, Bangladesh, China and Pakistan are able to sell at much lower prices than Indian companies .

Indian textile exports may fail to reach the set target of $25 billion as rupee appreciation and lower investments are taking its toll. It is expected to face a shortage of 16 percent in the current financial year.

Layoffs in Textile Industry: According to the CITI report on 'Impact of Textile Export Deceleration on Employment' around 2.72 direct jobs and nearly 3.2 lakh indirect jobs lost in fiscal year 2007-08.

Around 5.79 lakh new jobs in textile sector in 2007-08 are lost due to Rs appreciation.

Source: http://dyutita.blogspot.com/2007/11/rs-appreciation-setback-for-indian.html

Author: M.P.Singh

Is it Rupee Appreciation or Dollar Devaluation?

While it is true that the INR has appreciated against the dollar to record levels over the past one year, and now it is hovering at INR 40 to a USD, the fact is: so have most other currencies, including the Euro, gained against the US dollar. The INR may have gone up in comparison to the USD, but so have most others. Thus effectively, the INR has maintained its level against most other currencies (that have let market forces determine the rate). Hence, the real issue is not that the INR is appreciating, but that the USD is depreciating. This minor wordplay betrays the bigger implications.

Almost all world currencies, barring a few like Yen, have appreciated in comparison to the USD. It has been a global phenomenon. The rise of the INR is an economic phenomenon; as the economy becomes stronger so does the currency. But the current spurt should be referred to as dollar depreciation rather than merely a rupee appreciation.

In 2002, according to data available from RBI, 1 USD was equal to 48.59 INR; 1 GBP was equal to 73 INR and 1 euro was equal to 45.92 INR. As of today 1 USD is equal to 39.43 INR; 1 GBP is equal to 81.73 INR and 1 euro is equal to 57.59 INR. Thus in last 5 years INR depreciated against the euro and the UK pound, while going up against the USD.

The reasons are easily understood. Over the last few years, the US economy has been going through a meltdown. Economic growth has been steady and has been beset with crises, like the latest meltdown in the subprime lending market.

Thus we can say that it is USD which is going down and not the INR going up. Hence, the glass might seem half empty, but is half full as well.

The USD has dropped against most currencies. While that may affect the cost savings accrued to American companies, there is little change in the attractiveness of any specific offshore locations.

Source: Dataquest magazine Pg. No. 23,

Author: Shashwat DC shashwatc@cybermedia.co.in