Just few days on and everywhere there is just one thing being talked about; Rupee-Dollar Exchange Rate. How it has plunged to the all time low of 52.73? How rupee depreciation is going to effect the markets-positively or negatively? Who are the beneficiaries and who are on the verge of losing? Which businesses will flourish and which will be doomed? How this can be resolved and balanced out? And there are so many other questions running on minds of masses: be it the common man, business analyst, business conglomerates, politicians, etc. And so many strategies are being worked out to get out of this mess.
Let us take a closer look on how this exchange rate fluctuation takes a toll on everyone involved directly or indirectly in the business of making business. For your information Indian Rupee was floated against dollar in 1991 during the time of liberalization at 31.26 Rs per dollar. Before that we had a fixed exchange rate system where one currency used to be pegged at a fixed value against other currencies. However we changed this to floating exchange rate. Exchange rate can be defined as the rate at which a currency can be exchanged with other currencies. And Forex is the market to exchange currencies.
Exports and Imports: Generally when a currency depreciates against some other currency, it is the exporters who are benefitted, and importers are the ones suffering loss. Let us do simple maths here to illustrate the effect. Let us assume 1$= 50 Rs at present. So importers would be paying Rs. 50 per dollar for any commodity worth the price and similarly exporter would be getting Rs. 50 per dollar for any commodity that is sold worth it. Now let us say that Rupee depreciates to Rs. 52.73 per Dollar; i.e. now to buy one Dollar, one has to pay Rs. 52.73. In this scenario an importer is at huge loss as he will have to pay Rs. 2.73 extra per dollar. On the other hand exporter will get Rs. 2.73 more than before for the same transaction. So this is how exporters and importers incur losses and profits on currency fluctuation.
The Losers: Coming to the scenario today, when Rupee has depreciated to an all time low,52.73 against one dollar, importers are the ones going to suffer huge losses (as illustrated) and overseas travel, studying abroad and Medicare will get expensive. Companies and conglomerates would have to pay more foreign debts if they have not hedged properly. Also the govt. efforts to tame inflation would be all in vain as this depreciation will hike the prices of many commodities like fuel, electronic devices, etc.
The Market Scenario: This current depreciation of rupee against dollar is not being considered healthy for the market as a whole as the fear of global financial crisis is hovering. RBI has been limiting its intervention to curb this currency fluctuation seeing the inflation and signs of a slowing economy. However it will have to intervene in case of extreme volatility. Importers are confused if they should hedge or not at present date. The Fiscal Deficit of country is expected to increase as government would borne the differences in retail sector to avoid hue and cry among nation keeping in view the soaring prices of commodities. Also the central banks can’t provide help as we have the lowest foreign reserves. Above that corporate houses are pressurized to make foreign repayments that further increase the demand for US Dollar. So all this clubbed has put the market at a greater risk and risk of running into big deficits viz: both trade deficits and fiscal deficits prevails.
India Boiling: Already gripped among the problems of corruption, scams, inflation and instability the government is now entitled to tame another problem of currency fluctuations. This is not going to be anyhow a cake walk for them. This rupee depreciation will further increase the prices of the commodities, hike the fuel prices, etc. this will create havoc for the govt. Dollar Liability, Strained Liquidity and Import Issue will continue to hover around unless rupee is normalized against dollar.