Rising Rupee, Falling Dollar – Zero Sum Game?

July 15, 2012

The Indian rupee is close to its 9 year high against US Dollar, and scores of news has been written about it in the pink newspapers and business channels. They are mostly sympathic towards the Indian IT companies and how they has been adversely affected by its fall (1% of rupee apprecation means 0.75% fall in earnings).

Apart from IT sector, sectors like commodities (metals, petrochemicals), pharma, textiles are the other major losers. On the flip side, sectors such as refining   and marketing companies, engineering, auto and aviation sector, gains as their costs decrease in rupee terms.

The Goverment and RBI though is pleased with the rising rupee, as they get to curb inflation. Rupee   appreciation is aiding in increased supply of goods and services locally as imports are becoming cheaper and exports expensive, thus reducing inflation.

But  the above argument may hold good for developed nations like USA, UK where most of the goods are imported whether its clothes, vegetables or tea. But India imports mostly capital intensive  goods such as machinery, which hardly have an  effect on inflation. Another major import, crude oil is highly regulated by government, so it may not make much impact.

For India, exports leads to employment, and export led companies may be forced to take a tight hand in their expansion plans due to decrease in expected earnings, which may be a bad signal for the growth-led image of the country.