Rupee Appreciation and Depreciation

8/2/2019 Rupee Appreciation and Depreciation

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HardikHardik PatelPatel 30073007

ManaliManali ShahShah 30313031

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DefinitionDefinition

ForeignForeign exchangeexchange isis thethe processprocess ofof conversionconversionofof oneone currencycurrency intointo anotheranother currencycurrency.. ForFor aa

countrycountry itsits currencycurrency becomesbecomes moneymoney andand legallegaltendertender.. ForFor aa foreignforeign countrycountry itit becomesbecomes thethevaluevalue asas aa commoditycommodity.. ThisThis commoditycommodity charactercharactercancan bebe understoodunderstood whenwhen wewe studystudy aboutabout

ExchangeExchange RateRate mechanismmechanism..


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AUTHORISEDAUTHORISEDDEALERSDEALERS

ININ FOREIGNFOREIGN EXCHANGEEXCHANGE


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FLOATING EXCHANGE RATESFLOATING EXCHANGE RATES

ItsIts mainlymainly aa DemandDemand--SupplySupply GameGame..

AA currencycurrency appreciatesappreciates whenwhen institutionsinstitutions buysbuys moremoreunitsunits ofof anotheranother currencycurrency && vicevice versaversa..

InIn shortshort--run,run, duedue toto Increases/DecreaseIncreases/Decrease inin NominalNominalInterestInterest raterate..

InIn longlong run,run, duedue toto Inflation,Inflation, Productivity,Productivity, ReservesReservesandand CurrentCurrent AssetAsset..


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CentralCentral banksbanks interestinterest ratesrates cuttingcutting (appreciate)(appreciate) ororhikinghiking (depreciate)(depreciate)

TradeTrade surplusessurpluses -- currencycurrency appreciateappreciate oror TradeTradedeficitsdeficits -- currencycurrency depreciatedepreciate..

DifferencesDifferences inin realreal interestinterest ratesrates willwill definedefine thethe flowflowofof capitalcapital betweenbetween countriescountries..

FlowFlow ofof foreignforeign currenciescurrencies (( FIIsFIIs andand FDIsFDIs ))


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Isolating the exchange rateIsolating the exchange rate

effect of exportseffect of exports


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Isolating the Influence of theIsolating the Influence of the

Exchange Rate of importsExchange Rate of imports


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Why the Indian rupeeappreciated?Why the Indian rupeeappreciated?

Foreign Direct Investment (FDI)Foreign Direct Investment (FDI)

External Commercial Borrowings (ECBs)External Commercial Borrowings (ECBs)

Foreign portfolio inflowsForeign portfolio inflows

Remittances from Indians working overseasRemittances from Indians working overseas

RBI had raised cash reserve ratio to control inflation.

Export

Transportation Services.


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Strengthening RupeeStrengthening Rupee

The rupee has appreciated about 8.4% in 2007The rupee has appreciated about 8.4% in 2007

Rup

eeEquivalentof1USD

Exchange Rate - INR vs USD

40.5


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Painful SqueezePainful Squeeze Non IT FirmsNon IT Firms

The 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 rupee

rises, as it has, their entire profit gets wiped out

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

Garments exporter and auto-part suppliers are hurting even more. Many ofthem 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?What Kamal Nath says?

Interestingly Rupees is rising faster than Yuan. As India complies with fairtrade 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 localtaxes 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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BenefitBenefit

The appreciation of Rupee not only has softened the impact of higher oil prices andThe appreciation of Rupee not only has softened the impact of higher oil prices andmade capital goods cheapermade capital goods cheaper

Encouraged Indian tourists to travel abroad.Encouraged Indian tourists to travel abroad.

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

Importers are also benefited by paying less moneyImporters are also benefited by paying less money

Will affect employment creation in BPOs in a big way.Will affect employment creation in BPOs in a big way.

Customer will get more option to select.Customer will get more option to select.

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


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Challenges ofrupeeappreciationChallenges ofrupeeappreciation

A one per cent rise in the rupee against the dollar will have a 75A one per cent rise in the rupee against the dollar will have a 75--80 basis80 basispoints impact on the operating margins forIT companies.points impact on the operating margins forIT companies.

Exports will be badly effected.Exports will be badly effected.

Salaries of people working in MNC's would come down drastically.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 inIf the rupee appreciation continues, we have to go out and look for people inlowlow--cost areascost areas

Should look out for other countries other than US.Should look out for other countries other than US.

Controlling inflations.Controlling inflations.

Protection of domestic market.Protection of domestic market.


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THANK YOUTHANK YOU

Rupee Appreciation and Depreciation

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