rupee_appreciation_and_depreciation.ppt

7/27/2019 rupee_appreciation_and_depreciation.ppt

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Group Members

Hardik Patel 3007Manali Shah 3031Shachi Sangharajka 3021Jitesh Saiya 3018Forum Shah 3024

Mamta Shingala 3043Jinesh Sampat 3020


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Definition

Foreign exchange is the process of conversionof one currency into another currency. For acountry its currency becomes money and legaltender. For a foreign country it becomes thevalue as a commodity. This commodity charactercan be understood when we study about

Exchange Rate mechanism.


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AUTHORISED DEALERS

IN FOREIGN EXCHANGE


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FLOATING EXCHANGE RATES

Its mainly a Demand-Supply Game.

A currency appreciates when institutions buys moreunits of another currency & vice versa.

In short-run, due to Increases/Decrease in NominalInterest rate.

In long run, due to Inflation, Productivity, Reservesand Current Asset.


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Central banks interest rates cutting (appreciate) or hiking (depreciate)

Trade surpluses - currency appreciate or Tradedeficits - currency depreciate.

Differences in real interest rates will define the flowof capital between countries.

Flow of foreign currencies ( FIIs and FDIs )


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Isolating the exchange rate effect of exports


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Isolating the Influence of the Exchange Rate of imports


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Why the Indian rupee appreciated?

Foreign Direct Investment (FDI)

External Commercial Borrowings (ECBs)

Foreign portfolio inflows

Remittances from Indians working overseas

RBI had raised cash reserve ratio to control inflation.

Export

Transportation Services.


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Strengthening RupeeThe rupee has appreciated about 8.4% in 2007

R u p

e e

E q u

i v a

l e n

t o

f 1 U S D

Exchange Rate - INR vs USD

40.5


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Painful Squeeze Non IT FirmsThe smaller firms, including those that rely on the U.S. market are clearlyhurting.

Some 65% of our exports come from the SME segment. There are 15 millionworkers in this sector. The SMEs have profit margins of barely 5-10%. If the rupeerises, as it has, their entire profit gets wiped out

The Confederation of Indian Industry (CII) says that the worst hit are the textile andleather sectors

Garments exporter and auto-part suppliers are hurting even more. Many of them banked on the dollar appreciating routinely after signing a contract &these companies will be affected more than IT companies.

While the market should determine the exchange rate in the long run, sharpfluctuations in the short term create problems of adjustment for domesticindustry.


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What Kamal Nath says?

Interestingly Rupees is rising faster than Yuan. As India complies with fair trade and China does not - what is the ultimate ramification?

"The rupee appreciation is a cause of concern for exporters andmanufacturing firms... we are looking at framing a scheme for labor-intensive industries with no or very little import content to refund the local

taxes and levies," Minister of Commerce and Industries Kamal Nath said inMumbai on the sidelines of the 3rd India-GCC Industrial Forum.

"The rupee rise is a concern and the Ministry of Commerce is indiscussions with the RBI... the rise is also connected with internationalfactors like fall in the dollar. We are also in discussion with the export

council on what should be the way forward," Nath said.

The minister said the industry had built up resilience and become verycompetitive, and could digest the rupee appreciation.


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Arithmetic of the next trillion

The current market cap of the Indian bourses is $1.4 trillion.

A real GDP growth of 9.4% and inflation of 4.5%, the GDP shoulddouble in the next 5-6 years at a nominal GDP growth of 13%.

With market likely to sustain at around 120-130% of GDP, it is possible to envisage a doubling of market cap to around $3 trillionin the next 5 years.

This is a distinct possibility even without any major upward re-rating of India valuations and without further depreciation of thedollar vis--vis the rupee.


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BenefitThe appreciation of Rupee not only has softened the impact of higher oil prices and

made capital goods cheaper

Encouraged Indian tourists to travel abroad.

Students who want to study abroad has to spend less money as US dollar is nowcheaper by a similar quantum in rupee terms.

Importers are also benefited by paying less money

Will affect employment creation in BPOs in a big way.

Customer will get more option to select.

Though the strengthening of the rupee will benefit certain industries, others mightface the burnt. But the gain will be to the entire Indian economy. For thedevelopment of any country, strong infrastructure is required and that need hugeinvestments. Foreign Direct Investments would truly help India to stay as a strongeconomy in the world.


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Challenges of rupee appreciation

A one per cent rise in the rupee against the dollar will have a 75-80 basis points impact on the operating margins for IT companies.

Exports will be badly effected.

Salaries of people working in MNC's would come down drastically.

If the rupee appreciation continues, we have to go out and look for people inlow-cost areas

Should look out for other countries other than US.

Controlling inflations.

Protection of domestic market.


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THANK YOU

rupee_appreciation_and_depreciation.ppt

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