X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Rising rupee - Boon or bane - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 31, 2004

    Rising rupee - Boon or 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 and this is what we shall try to look at in brief in this article.

    The rupee has appreciated almost 7.3% in fiscal FY04 of which about 3.4% appreciation has come about in calendar year 2004 alone (3 months). Further, since its lows during May 2002, the rupee has been largely on a one-way street and has gained over 10% since then. However, much of the appreciation has come about in just the last 12 months or so and this could be attributed to the continuous inflow of US Dollars into the Indian markets, either by the Foreign Institutional Investors (FIIs) route, remittances or the FDI route, which has consistently added to India's forex reserves, which currently stands at close to US$ 110 bn. In fact, in 2004, IPOs have played an important role in attracting the foreign money, as the government raised close to Rs 150 bn in the current fiscal.

    Further, it seems that FII inflows are likely to continue in the near future for a slew of reasons that include the fast growing Indian economy, relatively attractive interest rates, major IPOs (of the likes of ICICI Bank, TCS, NTPC) currently in the pipeline and the export boom being witnessed in the country. So, in short, while those happy with the current currency appreciation may enjoy the same for some more time, the pressure on others (who are getting affected due to this phenomenon), might continue for a similar period. So, who are those being affected by the rising rupee?

    First let us look at the positives that follow a rising rupee:

    Benefit for importers: A rising rupee helps importers to buy goods and services at a cheaper rate that 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. With Indian companies taking advantage of the US soft interest rate regime and raising foreign currency loans, known as External Commercial Borrowings (ECBs), this is a welcome phenomenon from the point of view of their interest commitments on the loans raised. This will help them avoid taking a bigger hit on their bottomline, which is beneficial for its shareholders.

    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% 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 finalizing their study plans abroad. For example, a student's enrollment for a US$ 1,000 course abroad would now cost Rs 44,000 instead of the earlier Rs 49,000!

    Last but not the least: Considering that the government has been selling its stake aggressively in major PSUs in the recent past, and with a substantial chunk of this being subscribed by FIIs, the latter will have to shell out more dollars to pick up a stake in the company being divested, thus aiding the governments build up of reserves.

    Now, let us consider the other side of this coin i.e. the disadvantages of currency appreciation:

    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. This is vindicated from the fact that while in the month of February 2004, India's exports were higher by 35% over the same month previous year, in the first 11 months of the current fiscal, Indian exports have been higher by 15% YoY.

    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.

    While there are advantages as well as disadvantages of a rising Rupee, one needs to understand whether the rise in the Rupee is sustainable to derive any reasonable conclusion at this stage. For one, the weakness of the US Dollar is largely due to the relative unattractiveness of US assets. This is in part due to a very low interest rate regime prevalent in the US currently. Already there are indications that this low interest rate regime may not be sustainable for long. This means that US interest rates may go up and this is likely to strengthen the US Dollar. Hence we believe that the rise of the Rupee may not be sustainable for long. Without waiting for long, we may have to ascertain the benefits or otherwise of a falling Rupee.

     

     

    Equitymaster requests your view! Post a comment on "Rising rupee - Boon or bane". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS