The recent devaluation of Yuan has led to weakness in rupee against dollar. In
2013, the rupee had touched an all time low of 68.85 intra-day trades and today
(24.08.2015) it has touched 66.60 a USD. So far, it is the result of
devaluation of Chinese currency but what will happen when U.S. Fed start
hiking the interest rates and/or oil companies the world over start
remitting billions of dollars to Iran as a consequence of lifting of UN
sanctions on Iran. This would lead to an outflow of foreign funds from the
emerging markets and India will not be an exception.
Let us analyse the reasons and results of falling rupee in Indian context.
In currency market rupee is a commodity whose price is the corollary of
demand and supply. In the present circumstances, dollar is in more demand
vis-à-vis the rupee.
There is a very big Giant in international market called Foreign Institutional
Investor (FII). It keeps on moving from one economy to another in search of
maximum gain. In 2008, when US and European economies were in shambles, the FIIs
moved to Indian (and Chinese) economy, thus projecting a distorted image of
strong rupee and higher index. India became complacent that its economy was
stronger than US economy, thus remaining under delusion that as per law of
Mother Nature cycle, India would become the super power with no place for US to
exist on this planet.
But keeping a giant at home is not devoid of inherent risk. The money from
abroad was , inter alia, invested in stocks and put in deposits with the banks
. The mere investment in secondary market has no positive impact for the
economy to grow whereas investment in deposits carries cost. Since money
was in India, that period was a big opportunity to develop infrastructure and
production environment ,after all , the paper currency derives its strength from
the sound economy , viz, lower current account deficit, lower inflation, higher
employment etc . But Alas! The period coincided with platitude of scams,
investigations and inertia of making any decisions in the country. The
government and the parliament had become practically defunct. The country was
left to Almighty God. Thus Nature played its cardinal principal ‘Only fittest
Now that the US economy is on recovery path, the giant FII, after its sojourn in
India and wolfing the wealth of the country by way of interest, dividend
etc, is flying back to its home town, bigger and fatter.
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Let us analyze who is gainer from the falling rupee:-
1. Every import is becoming costlier. Unless importer is able to pass on the
increased cost to the ultimate consumer, like oil companies, he is doomed as
his investment in plant and machinery may go waste if he is dependent on
imported raw material.
2. If importer has taken buyers’ credit for trade or capital goods and has not
hedged the currency position under the impression of natural hedge, in case he
happens to be an exporter as well, he is grossly mistaken and will get hurt.
3. Students who have gone to study abroad and have not taken hedge for the
1. Exports which have already been made but proceeds still not realized-
currency has already been booked. Exporters must be cursing themselves for not
keeping the position open.
2. Exports where contracts have already been signed but shipment not ready- they
are severely affected since:-
a. Currency hedging already been done, thus not able to enjoy the fruits of
b. The cost of raw material for shipment has gone up due to rising inflation,
an upshot of devaluation of currency.
It is said that ‘Man is born free, but he is in chains everywhere’. The
exporters in this situation are chained to their extremities. In case they feel
that exports at the contracted rates have become unviable,
they cannot rescind the contract warranting penalty
clause and the exchange loss since currency already booked.
3. Exports which are to be made in future – the overseas importer is diligent
and clever enough, he understands the exchange value of dollar to rupee and
bargains tough to squeeze the entire benefit from the Indian exporter on
exchange front. Poor Indian exporter would curse himself having born in India.
The major end result of falling home currency is inflation and who are the
people affected due to inflation:-
- Upper Class - No. They have sufficient cushion to withstand
- Lower Class - No. Since their main requirement FOOD is assured
by Food Security Bill.
- Middle Class - Poor Fellow, why are you born on this earth!. You
have no personality of your own- neither Upper Class nor lower class. You
don’t have any right to exist. Your extinction is imminent.
* Mr Tilak Gulati is working as Assistant General Manager, UCO Bank He can be
reached through email@example.com
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