Effect of Rupee Appreciation on Different Sectors

7/27/2019 Effect of Rupee Appreciation on Different Sectors

1/11

EFFECT OF RUPEE APPRECIATION

ON DIFFERENT SECTORS

SUBMITTED BY:

BENSON RICHARD KANDULNA-MBA/1080/06 MUZTAR HUSSAIN- MBA/1101/06

SHRIYA WALI-MBA/1070/06

VISHAL SAHU-MBA/10/06


2/11

RUPEE THE HISTORY OF

REVALUATION AND DEVALUATION The Fall Of Rupee:

All industrializing countries followed Germany

in adopting a gold standard throughout the

1870s. India, subject to imperial policies didn't

move to a gold standard. A huge divide betweensilver-based and gold-based economies resulted.

With discovery of more and more silver

reserves, those currencies based on gold

continued to rise in value and those based on

silver were declining due to demonetization of

silver.

1966 Economic cri sis:Since 1950, India ran continued trade deficits

that increased in magnitude in the 1960s.

Government of India had a budget deficit

problem and could not borrow money from

abroad or from the private corporate sector, due

to that sectors negative savings rate. As a result,

the government issued bonds to the RBI, which

increased the money supply, leading to inflation.

1991 Economic cr isis:

In 1991, India still had a fixed exchange rate

system, where the rupee was pegged to the value

of a basket of currencies of major trading

partners. India started having balance ofpayments problems since 1985, and by the end

of 1990, it found itself in serious economic

trouble.At the end of 1999, the Indian Rupeewas devalued considerably.

Revaluation:

In the period 2000-2007, the Rupee stopped

declining and stabilized ranging between 1 USD

= INR 44-48. However in the mid-2007, the

rupee has started gaining strength and for the

first time in more than a decade broke the 1

USD = INR 40 barrier. This has led to severe

business challenges for Indian firms such as

Infosys, TCS and Wipro that have benefited

considerably from foreign outsourcing.
http://en.wikipedia.org/wiki/Infosyshttp://en.wikipedia.org/wiki/TCShttp://en.wikipedia.org/wiki/Wiprohttp://en.wikipedia.org/wiki/Wiprohttp://en.wikipedia.org/wiki/TCShttp://en.wikipedia.org/wiki/Infosys


3/11

DEVALUATION HISTORY: A VIEW

Year

Value of one

Rupee (units per

US$)

1970 7.576

1975 8.409

1980 7.887

1985 12.369

1990 17.504

1995 32.427

1996 35.433

1997 36.313

1998 41.259

1999 43.055

2000 45.000

2006 48.336

2007(Oct) 38.48

2008(Mar) 40.51


4/11

RUPEE DEPRECIATION:ITS CONSEQUENCES

ADVANTAGES DRAWBACKS

The precipitous fall in the value of thecurrencies of the Southeast Asianeconomies, Russia and Brazil amongstothers have rendered the rupee overvaluedin real terms & adversely affected theIndian economy and this is reflected in thelarge current account deficit and the dulleconomic conditions.

A depreciation of the Indian rupee wouldlead to a shift in at least a part of thiscompetitive advantage to the Indianexport firms, thus boosting Indian exports.The rise in exports will give a boost to therecovery of economic growth.

Similarly, a weaker domestic currencywould make imports dearer. This will actas a barrier against imports, thusimproving the trade balance

Weaker domestic currency would helpattract more foreign domestic investment

A major drawback of depreciation in thevalue of the rupee is that it will increasethe burden of servicing and repaying of

foreign debt of the Indian Government(which has dollar denominated debt)and those companies that have raiseddollar denominated debt.

Another drawback of a weak currencyis that it might dissuade foreigninstitutional investment (FII) frominvesting in the country.

Another fallout of a weaker currencycould be higher interest rates in theeconomy, with the help of which thecentral bank/Government might want tofight off the pressure of depreciation in

the value of the domestic currency.


5/11

RUPEE APPRECIATION :MISSES !!

After depreciating by 6.2% between April 2nd 2004 to August 6th 2004, the Rupee hasappreciated by as much as 5.7% since then one cannot ignore the fact that it has implicationson the stock market and profitability for India Inc.

The data is of FY04 from the Quantum Universe of 350 companies. All figures are as apercentage to sales, on a standalone basis. We have divided the export dependent sectors intothree sets i.e. software, pharmaceuticals and companies from other sectors.

Given the fact that software exports (including ITES) accounted for an estimated 17.9% ofthe country's exports in FY04, it is not surprising to see that the contribution of exports torevenues of technology companies are higher.

domestic pharma majors are also highly dependent on exports viz. US, Europe, SouthAmerica and SAARC countries. Of the consolidated revenues of Ranbaxy, 43% wasaccounted by the US markets in FY04. In the case of Dr. Reddy (REDY.BO, news) 's, thecontribution stood at lower at 28% in FY04. While companies like Biocon, Nicholas Piramal

and Wockhardt do not have significant US contribution as of now, going forward, this islikely to increase and to that extent, margins may be affected. Besides pharma majors.

other sectors from the list that are highly dependent on exports are hotels (Hotel Leelaventureand EIH) and Nalco. On a conservative basis, dollar denominated revenues account for atleast60% of room revenues of hotel companies. While the removal of the quota regime is apositive for the textile sector, if rupee continues to trade firm or appreciate, it may not be thatprofitable. In this context, expectations need to be realistic.
http://in.finance.yahoo.com/quote?s=REDY.BOhttp://in.biz.yahoo.com/n/bo/r/redy.htmlhttp://in.biz.yahoo.com/n/bo/r/redy.htmlhttp://in.finance.yahoo.com/quote?s=REDY.BO


6/11

Software Pharma Other sectors

SatyamComputers 90.2 Wockhardt(WCKH.BO,

news)

36.6 Nalco 55.3

Hughes Software 94.3 Cipla (CIPL.BO,

news)

44.1 United

Phosphorus

57.3

Geometric

Software

95.1 Lupin 47.3 Satnam Overseas 57.6

Infosys 95.2 Aurobindo 51.0 AshapuraMinechem

58.6

i-flex 95.3 JB Chemicals 51.8 EIH 58.6

Mastek

(MAST.BO,

news)

95.9 Dr. Reddys 58.9 Hotel

Leelaventure

66.5

Digital 98.2 Biocon 59.8 Sesa Goa 69.7

Patni Computers 99.6 Ranbaxy 62.4 Welspun India

(WLSP.BO, news)

74.3

Mphasis BFL 99.6 Orchid Chemicals 76.6 Himatsinka Seide 92.5

VisualSoft

(VISO.BO, news)

100.0 Divis 85.4 Suraj Diamonds
http://in.finance.yahoo.com/quote?s=WCKH.BOhttp://in.biz.yahoo.com/n/bo/w/wckh.htmlhttp://in.finance.yahoo.com/quote?s=CIPL.BOhttp://in.biz.yahoo.com/n/bo/c/cipl.htmlhttp://in.finance.yahoo.com/quote?s=MAST.BOhttp://in.biz.yahoo.com/n/bo/m/mast.htmlhttp://in.finance.yahoo.com/quote?s=WLSP.BOhttp://in.biz.yahoo.com/n/bo/w/wlsp.htmlhttp://in.finance.yahoo.com/quote?s=VISO.BOhttp://in.biz.yahoo.com/n/bo/v/viso.htmlhttp://in.biz.yahoo.com/n/bo/v/viso.htmlhttp://in.finance.yahoo.com/quote?s=VISO.BOhttp://in.biz.yahoo.com/n/bo/w/wlsp.htmlhttp://in.finance.yahoo.com/quote?s=WLSP.BOhttp://in.biz.yahoo.com/n/bo/m/mast.htmlhttp://in.finance.yahoo.com/quote?s=MAST.BOhttp://in.biz.yahoo.com/n/bo/c/cipl.htmlhttp://in.finance.yahoo.com/quote?s=CIPL.BOhttp://in.biz.yahoo.com/n/bo/w/wckh.htmlhttp://in.finance.yahoo.com/quote?s=WCKH.BO


7/11

RUPEE APPRECIATION : HITS !! The biggest beneficiaries from the Rupee appreciation are importers. Companies from energy

dependent sectors are likely to benefit in a significant manner (energy, paints and few textile

majors). Companies that source raw materials from the global markets and are largely

domestic demand driven could potentially witness margin improvement.

Rupee appreciation is also a positive for the government's financials and capital goods sector.

Energy & petrochemical Other sectors

HPCL 18.1 Mercator Lines 56.9Gulf Oil(GULF.BO, news)

18.9 Welspun Gujarat 60.0

SouthernPetrochem

22.1 Apar Industries 60.5

Flex Industries 24.3 D-Link India 63.8

IOC 31.0 Sterlite Industries 66.7

Finolex (FINX.BO,news)

36.0 Zuari Industries 68.6

Chennai Petro 60.7 Suraj Diamonds 75.1

Kochi Refineries 62.4 Moser Baer 76.1

Reliance(RELI.BO, news)

65.2 STC India 78.9

MRPL (MRPL.BO,news)

67.0 GodavariFertilisers

86.3
http://in.finance.yahoo.com/quote?s=GULF.BOhttp://in.biz.yahoo.com/n/bo/g/gulf.htmlhttp://in.finance.yahoo.com/quote?s=FINX.BOhttp://in.biz.yahoo.com/n/bo/f/finx.htmlhttp://in.finance.yahoo.com/quote?s=RELI.BOhttp://in.biz.yahoo.com/n/bo/r/reli.htmlhttp://in.finance.yahoo.com/quote?s=MRPL.BOhttp://in.biz.yahoo.com/n/bo/m/mrpl.htmlhttp://in.biz.yahoo.com/n/bo/m/mrpl.htmlhttp://in.finance.yahoo.com/quote?s=MRPL.BOhttp://in.biz.yahoo.com/n/bo/r/reli.htmlhttp://in.finance.yahoo.com/quote?s=RELI.BOhttp://in.biz.yahoo.com/n/bo/f/finx.htmlhttp://in.finance.yahoo.com/quote?s=FINX.BOhttp://in.biz.yahoo.com/n/bo/g/gulf.htmlhttp://in.finance.yahoo.com/quote?s=GULF.BO


8/11

EFFECT OF RUPEE APPRECIATION TEXTILE MACHINERY INDUSTRY: The sector is witnessing a loss of 9.7 % due to rupee

appreciation. The appreciating rupee to the extent of 14% in the last one year had a very bad effect on thetextile sector, as overall margins for the industry are below 10%. As many sectors like textile machinery,accessories and chemicals and auxiliaries also depend on the textile sector, they too have been severelyaffected.

The Information Technology (IT) and Business Process Outsourcing (BPO) companies in India felt thepinch as 70 percent of the payment by the clients was done in dollars resulting in losses for companies inthis sector. IT & BPO were sunshine sectors in India, contributing some 5.2 percent to India's GrossDomestic Product (GDP), and it was estimated that between 20 and 25 percent of India's GDP expansion in

the next three to four years would come from the IT industry in India. But the rise in rupee value wasincreasingly proving to be a disadvantage for this sector.

The healthcare industry has come under a lot of price pressure especially from the US and Europe. Theirexpenditure has gone up and the performance has not been very good, both in the top and bottomline. It isonly because of acquisitions that some of them are doing well. Whats pulling down the sector is the exportvaluations, said a healthcare analyst from a city-based broking firm.

The Rs 30,000-crore leather industry, with 46% exports, achieved a positive export growth rate of 10.72%in rupee terms last year. It was aiming to achieve further growth this year. The continuous appreciation ofrupee against dollar in the last seven to eight months has affected the industry. This has resulted in the

decline of export of leather and leather products from Rs 8,020.75 crore in April-October, 2006 to Rs7,786.86 crore in April-October, 2007, a negative growth of 2.92%.

The hospitality sector is feeling the heat of the appreciating rupee. Senior officials of hotel majors,including Hotel Leelaventure Ltd, Indian Hotels Company Ltd and Royal Orchid Hotels Ltd (ROHL),confirmed that the rising rupee had impacted their topline growth by about 8-10 per cent during the firstquarter of the current fiscal. The hotels, however, witnessed an overall growth on the back of a boomingeconomy.

AUTOMOBILE COMPONENTS INDUSTRY: A stronger rupee has shaved off 10% from the exportrevenues of many small component makers in this period.


9/11

A MIXED RESPONSE: STRENGTHENED RUPEE

Indian industry looked confused over the issue whether the RBI should intervene in order to

protect exporters from the gaining rupee or not.

As per CII, the domestic industry would have to accept a strengthening rupee in the short

term, whereas, FICCI, Assocham and FIEO fancies RBI to check the sharp climb in the

currency.

IT sector and labor-intensive sectors such as textiles and leather, must be protected.

The appreciation of the rupee is finally taking a toll on exports and an Assocham study today

estimated their deceleration to 145 billion dollars against the targeted figure of 160 billion

dollars for 2007-08.

Any appreciation in the rupee results in an erosion in the value of the RBI's foreign exchange

reserves in its balance sheet.

In a bid to grant relief to the exporting group that has been making loud demands for

assistance against the intense growth in the Indian currency versus the U.S. dollar, the Centre

expanded the span of service tax refund to exporters and also extended the number of spheres

entitled for inferior interest rates on pre-shipment and post-shipment credit.

With infrastructure demanding large funds, especially foreign capital, it is of utmost

importance that the country has an appreciating currency to instill confidence among

overseas investors. Thus, an appreciating currency is the need of the hour and any lobby

against this is counterproductive


10/11

SUGGESTIONS

The government can reduce export duty for exporters.

The government can waive off the custom duty.

The exporters should reduce there over-dependence on Dollar.

FIIs: one can be very optimistic regarding the flows from

foreign land to India because India is still an untapped market

for many of the big investors and we account for only 1% of

worlds inflow.


11/11

THANK YOU

Effect of Rupee Appreciation on Different Sectors

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