- Posted June 23, 2014 by
Rupee Depreciation: Good or Bad for Indian Economy
Fluctuating value of the Indian Rupee against the US Dollar has always been a major concern for the Indian economy. In 2013, the value of Indian Rupee started depreciating from Rs 51 – Rs 52 levels and in August it had hit rock bottom of Rs 69. The Indian rupee had depreciated nearly 25% in a span of 6 months. Additionally, it was also the worst performing currencies in the world, especially among the emerging nations. A depreciating rupee can effect spell trouble on both micro and macroeconomic fronts.
Indian economy is comprised of many diverse sectors which contribute in its own way. There are few sectors which tend to benefit from the falling rupee while others tend to gain. Let’s have a look at those sectors which tend to benefit when the rupee falls.
Informational Technology is undoubtedly the biggest beneficiary of the falling rupee. Contribution of the IT sector to the Indian economy increased from 1.2% in 1998 to 7.5% in 2012. The IT sector became a $100 billion business in 2012 of which 70% of the services were exported while the remaining business came from India. This being said if the Indian rupee weakens and if maximum business of the IT sector comes from foreign countries, the IT sector tends to gain. Falling rupee tends to leverage the profitability of IT companies to a new high. During 2013-14, Indian IT sector outperformed BSE Sensex and NSE Nifty by a huge margin.
Stocks in the pharma sector are popularly known as defense stocks. The Indian pharmaceutical sector is a massive $1.2 billion sector in India. Majority of the pharma companies export medicines. As of 2012, Indian pharma sector alone exported $15 billion to the global pharma market. Of those $15 billion, US market has been the recipient of nearly half the products. Similar to the IT sector, a falling rupee also helps pharma companies to increase profitability. Since the Indian rupee is more prone to huge fluctuations, most of the companies hedge themselves by purchasing future contracts. Sometimes, pharmaceutical giants tend to raise money in the foreign markets by issuing bonds. So any positive or negative movement of the domestic currency affects the interests owed ultimately affecting the profitability.
Tourism sector is one of those sectors which is highly correlated with the appreciation or depreciation of Indian rupee. When INR declines, Indian currency becomes cheaper. This boosts the purchasing power of the foreign nationals who visit India. As the same cost in dollar terms, they can spend more money in India. Post rupee depreciation in Indian Rupee, tourism enquires increased by 10% while number of tourists increased from 3.7 million to 3.83 million, up 3.3% year over year.
Apart from the above said sectors, there are many export oriented companies whose source of revenue is foreign companies.
There are various aspects on the economic front which tend to be affected with decline in the value of Indian rupee. The most important economic aspect which is vulnerable to depreciation of Indian rupee is the Current and Capital Account Deficit. With the fall in the rupee, importers tend to import less products since the companies have to pay more money which they could have imported at lower cost. They delay the orders which ultimately lead to a disturbance in synchronization of demand and supply. Any disturbance in demand and supply on a national scale immediately results in inflation and deflation.
Current Account Deficit
Apart from the inflation problem, the economic growth cycle stops chugging at a fast rate which leads to slower economic growth. There are some sections in India where one has to import products which are a necessity such as crude. With the falling rupee, crude becomes more expensive which adds more weigh towards inflation. This directly leads to increase in the current account deficit.
Capital Account Deficit
With the fall in rupee, foreign investors get cautious from investing in equity markets because the value of rupee has declined. This directly affects on lower return on equity and debt. Hence, with the fall of Indian rupee, FIIs start pulling back the money which results in erosion of capital gains.
With the economic growth slowing down and rising inflation coupled with FIIs pulling back the money market, these results in lesser job opportunities. This kind of an economic situation directly spells trouble for a common man who cannot make both ends meet on an average salary.
The Reserve bank of India is responsible for ensuring that the Indian rupee stays in check. Any drastic move, irrespective of it being upward or downward can spin the economic situation out of hands. The government has to stay on foot to check of any possible currency problems. For example, during August 2013, essential steps were taken to keep the rupee in check by controlling the gold imports and purchase of any foreign assets.