Appreciation of Rupee - Boon or Bane

Is the strengthening rupee, a boon or a bane?

Well, actually both. It depends from case to case whether the appreciation of the rupee is an advantage or a disadvantage.


Just to give a small example, while the appreciation in the rupee is a positive for the energy sector, it is a cause for worry for the domestic software sector. However, there are few more points that go for and against the rising rupee.

So, who are the ones being affected by the rising rupee?



Lets see the positive side first :



Benefit for importers: A rising rupee helps importers to buy goods and services at a cheaper rate than earlier. This is vital for a developing economy that relies heavily on imports. While exports have picked up strongly in the last two years so have imports and this is a good indication for the Indian economy as higher imports normally mean increased economic activity.



Foreign debt service: Appreciation of the rupee helps in easing the pressure, related to foreign debt servicing (interest payments on debt raised in foreign currency), on India and Indian companies.



Outbound tourists/student bonanza: The appreciating rupee is a big positive for tourists traveling or wanting to travel abroad. Considering that the rupee has appreciated by over 10 per cent against the US dollar since mid-2002, traveling to the US is now cheaper by a similar quantum in rupee terms.
The same applies to students who are still in the process of finalising their study plans abroad. For example, a student's enrollment for a $1,000 course abroad would now cost Rs 44,000 instead of the earlier Rs 49,000!



Considering the disadvantages:



Exporters disadvantage: The exporters are at a disadvantage owing to the currency appreciation as this renders their produce expensive in the international markets as compared to other competing nations whose currencies haven't appreciated on a similar scale.
This tends to take away a part of the advantage from Indian companies, which they enjoy due to their cost competitiveness. However, it must be noted that despite the sharp currency appreciation in recent times, Indian exports have continued to grow.



Dollar denominated earnings hurt: The strengthening rupee has an adverse impact on various companies/sectors, which derive a substantial portion of their revenues from the US markets (or in dollar denominations). Software sector is the best example, which is adversely impacted by this appreciation in rupee.
To combat this, Indian software companies need to hedge their dollar earnings, which involves a cost. Further, their earnings tend to face pressure because of the fact that while a major part of their revenues is in US dollar terms (as exports form a major source of their revenues), the costs incurred are in rupee terms, as most of the work is done offshore (in India).
Other sectors that tend to get hit by this phenomenon include the domestic pharma and textile industries, most of which have a similar revenue model.