Is a Rising Rupee Really That Bad?

We have heard about the Reserve Bank of India's rationale for not interfering in the currency markets. They want to fight inflation and a rising rupee is their means to do it. India imports its oil and now food grains. A rising rupee would in turn lower the amount of dollars needed to buy it (as trade generally happens in dollars). So, with a rising rupee more oil and food grains can be purchased. This leads to more supply and hence to lower inflation.

On the flip side, exporters are hurt. They get less rupees for goods / services. Let's take the IT/ITES/BPO sector. They still have to pay the same salaries in rupees and the amount of dollars they get for the work done is also same (thereby earning less in rupees). This puts a pressure on their margins.

Clearly, this is what happening in India. Consumers are benefiting at the expense of exporters. Or are they? There is no denying that the rising rupee (irrespective of whether it is overvalued or not) is good for consumers. They can now take that foreign trip (though only to the US or Japan) and spend less in rupees. They also benefit from cheaper goods in the country.

However, I would argue that a rising rupee is not that bad for exporters either. Every firm has following costs associated. They have to pay the salaries and they have to meet their debt obligation. Now granted rising or falling rupee will have no impact on salaries (at least in the short term) but it does have an impact on debt obligation. If a firm has dollar denominated debt its easier to see how a rising rupee is good for the company (their outflow in dollars remains same but because of appreciating rupee their obligation in rupees falls). For a firm with debts denominated in rupees the relationship is a little tricky but its exists especially in the Indian scenario.

RBI is allowing the rupee to rise as it anticipates to control the inflation. This means they will hold of any Interest Rate increases. In turn this implies that for debt denominated in rupees the firms can breathe easy knowing their debt obligation is not going to increase with every RBI meeting. Furthermore, if RBI interferes to stem the rise of the rupee it will most likely issue Bonds. This would imply that the government will have to pay Interest on it.

Now this is money that could be better utilized in developing infrastructure (roads, electricity, airport). Better infrastructure would in turn lead to lower input costs for firms. Thus, further lessening the impact of the rising rupee and in the process improving the quality of life. Granted, for exporters, the rise in the rupee is much steeper than the benefits they get. But as an individual, I would rather let the rupee rise than have my mortgage payment go up. I would also let the government focus on improving the infrastructure than waste it on paying interest.

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Comments

[Anand Gupta:]

Great Analysis! Can you please share insights into how rising rupee will affect the stock market in next one year period.

Thanks,
Anand

2007 May 15 11:50 AM

[brij srivas...:]

Sir, since independence we been taught that a strong dollar is good for us.So,what we have in india today is wealth is on the side of sectors/people involved with exports.The move from strong dollar to a strong rupee will have to be gradual and also be based on the mindset of policy makers of the day.I do foresee a clear shift to a strong rupee as india is now been touted as a high consumption place.Consumption patterns will need to be closely watched between US and India...one obese,the other starved.I wonder whether there is any need to watch fall in dollar,as rising rupee does not necessarily mean a fall in dollar.

2007 May 19 12:58 AM