Depreciating INR… Gainers & Losers

Friday, May 18, 2012

With Indian rupee depreciating, it grim picture painted out on our economy. The instability is attributed to many factors including Euro crisis. Since 2006 economies around world is in turmoil, if one country attempts to come out, it impacts directly or indirectly the other country. It started of with US mortgage crisis in 2006/07, which was followed by Lehman brothers and other financial institution collapse in 2008, then came crash of stock markets, Euro crisis which was followed by appreciation of gold. The news coming out these days is quite conflicting, on one month one would see economic recovery being projected and the following month, one would see depressing news about economy.  
 What does rupee depreciation mean to Indian economy and who could be the probable Gainers or Losers?.

The Gainers: 

Exporters, particularly who are using the resource and raw materials by paying them in INR and getting return in USD. Companies earning in USD and reporting and exchanging to INR would stand to gain 

Indian Origin people sending foreign currency to India and converting into INR and making permanent investment in India. The reason being they would be getting more INR for lesser amount of USD. A 100 USD with exchange rate of 56.5 will fetch more INR compared to 100 USD with exchange rate of 40 INR.

 The Losers: 

Importers, more particularly India Government importing large volume of oil are bound to suffer. Normally such increase in Oil cost is passed on to the customer and naturally people of India would have to burn the money more. This would eventually continue spiraling of inflation, which is already high. 

Foreign equity investors who are looking for gains might lose, if attempt to pull out money. They now have to think or hold it for some time. The reason being, assume a foreign investor had invested in company ‘X’ in India when exchange rate was INR 45.00 (1 USD) and if he had invested USD 100, would exchanged to INR 4500 and invested the same. If there is a lock in period of 3 years and due to company profits the amount becomes INR 5700 in 3 years time, which is around 10% in ROI per year. However if the Foreign equity investor attempts to repatriate the investment back, due to prevailing exchange rate of 57 INR per dollar, the FI would get only 100 USD, in spite of money being invested for 3 years. 

In short term for India, it’s good that money does not flow out of India remain within India, however, in long run if INR is volatile and continue to depreciate the foreign investor would lose interest in Indian market.

Hence naturally, there is more to lose as for as India is concerned and lets hope INR bounces back in exchange rate.

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