Thursday, May 10, 2007

Rising Rupee - Is it really bad?

We have heard about RBI's rationale for not interfering in the currency markets. They want to fight inflation and a rising rupee is their means to do it. India imports its oil and now food grains. A rising Rupee would in turn lower the amount of $ needed to buy it (as trade generally happens in $). So, with a rising Re more oil and food grains can be purchased. This leads to more supply and hence to lower inflation.

On the flip side exporters are hurt. They get less Re for goods / services. Let's take IT/ITES/BPO sector. They still have to pay same salaries in Re and the amount of $ they get for the work done is also same (thereby earning less in Re). This puts a pressure on their margins.

Clearly, this is what happening in India. Consumers are benefiting at the expense of exporters. Or are they?

There is no denying rising Re (irrespective of whether it is overvalued or not) is good for consumers. They can now take that foreign trip (though only to US or Japan) and spend less in Re. They also benefit from cheaper goods in the country.

However, I would argue that rising Re is not that bad for exporters too. Every firm has following costs associated. They have to pay the salaries and they have to meet their debt obligation. Now granted rising or falling Re will have no impact on salaries (at least in short term) but it does have an impact on debt obligation.

If a firm has dollar denominated debt its easier to see how a rising Re is good for the company (their outflow in $ remains same but because of appreciating Re their obligation in Re falls).

For a firm with debts denominated in Re the relationship is a little tricky but its exists especially in the Indian scenario. RBI is allowing Re to rise as it anticipates to control the inflation. This means they will hold of any Interest Rate increases. In turn this implies that for debt denominated in Re the firms can breathe easy knowing their debt obligation is not going to increase with every RBI meeting.

Furthermore, if RBI interferes to stem the rise of the Re it will most likely issue Bonds. This would imply that the government will have to pay Interest on it. Now this is money that could be better utilized in developing infrastructure (roads, electricity, airport). Better infrastructure would in turn lead to lower input costs for firms. Thus, further lessening the impact of rising Re and in the process improving the quality of life.

Granted, for exporter, the rise in Re is much steeper than the benefits they get. But as an individual, I would rather let Re rise than have my mortgage payment go up. I would also let government focus on improving the infrastructure than waste it on paying interest.


  1. Hi

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  2. have assumed that the Company's keep their debt unhedged of the forex rish while writing this, which is not true, as the company's generally dont take an exchange rate risk.

  3. Hi Abhi Lash

    I own a export company

    i agree with the previous comment

    i do not keep my forign debts at risk with respect to the exchange rate ..

    i do book my payments much in advance .. and normally all the exporters do that ..


  4. I agree with Rakesh and anonymous that hedging would reduce the risk of foreign debt. I also agree that rising rupee does hurt exporters.

    However, I believe that the exporters will have some indirect benefits as outlined in the article.

  5. so is it better for say an american company to pay their indian employees in rupees or dollars?