STRATEGIC APPRECIATION OF INDIAN CURRENCY: …globalvisionpub.com/globaljournalmanager/pdf/1387004634.pdf · STRATEGIC APPRECIATION OF INDIAN CURRENCY: ITS IMPACT AND IMPLICATIONS

STRATEGIC APPRECIATION OF INDIAN CURRENCY: ITSIMPACT AND IMPLICATIONS ON INDIAN ECONOMY

S.M. Tariq Zafar* and S.R. Sharma**

ABSTRACT

The domination of dollar proved to be vulnerable and start tasting sharp appreciation ofother nations currencies after all. Decline in dollar is due to level of debt of America who isthe largest debtor in history owing between 70 to 100 trillion dollar. Devaluation in dollaris advantageous to India because import cost will get reduced due to devaluations ofdollar and appreciation of Indian rupees as India's imports are more than exports.Appreciation of Indian rupee will change the balance of payment .Goods like gold andcrude oil will cost cheaper in term of appreciated Indian rupee. In fact, appreciation ofcurrency of a country show healthy sign for its development. According to economistimplication is always different from implementation; it is paramount factor and will cast itsshadow in the case of India’s recent joy of rupee appreciation. On the other end appreciationof Indian currency is matter of concern and embraces many implicit and explicit problems.Economists and experts from different sector predict the detrimental and controlled impactof rising rupee on Indian economy.

Key Words: India, Rupee, Dollar, Appreciation, Impact

OBJECTIVES AND METHODOLOGYThe main objective of this paper is to analyze the impact of rupee appreciation on India’s

imports and exports. Attempt has also been made to study the impact on the balance ofpayments due to this development. In this paper the authors have initiated to trace out the realimplications and consequences of rupee appreciation on Indian economy keeping in view thecurrent scenario. The paper reveals that with the sharp and positive appreciation of currency,Indian economy will motivate long run gain with little to lose. The study is based on the

* Professor & Head Department of Management Studies Dehradun Institute of Technology, Dehradun.E-mail:[email protected]

** Associate Professor Dehradun Institute of Technology Dehradun, Uttrakhand, India. E-mail [email protected]

Strategic Appreciation of Indian Currency: Its Impact and Implications...

ISSN: 0973-8533

Vol. 2 No. 1, June 2008GJBMGJBMGJBMGJBMGJBM

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Vol. 2, No. 1, June, 2008

secondary data collected from various government records and published national andinternational documents.

STRATEGIC APPRECIATION OF INDIAN CURRENCY

Its Impact and Implication on Indian Economy

The History of money is a deep complex story spanning thousand of years and consideredto be scare good. Many articles used as money, from naturally scant precious metals to conchshells through cigarettes to artificial banknotes. Mode of exchange used by primitive peoplewas referred to as "Old and Curious, Horses were used by the Kyrgyz as the principalcurrency unit and make small exchange through lambskins.

It is believed that India has been one of the earliest issuers of coins in the world (circa6th century BC). Historians commonly believe that Emperor Sher Shah Suri (1486-1545)introduced world’s first rupee, based on a ratio of 40 copper pieces (paisa ) per rupee. Mostlyin entire India, the rupee is known as the rupee, roopayi, rupaye-rubai or term derived fromthe Sanskrit rupyakam. In Devangari raupya meaning silver, rupyakam meaning (coin) ofsilver. So, historically, the rupee was a silver based currency and very first standard was setby Emperor Sher Shah Suri, Sher Khan founder of the Sur dynasty based on a ratio of 40copper pieces (paisa ) per rupee.

In India the earliest issues of paper rupees was from Bank of Hindustan (1770-1832), theGeneral Bank of Bengal and Bihar (1773-75, established by Warren Hasting) and the BengalBank (1784-91). This had severe consequences in the 19th century, when the strongesteconomies in the world were on the ‘gold standard’ (Davies and Davies, 1996). Change inmode of transaction at international level began due to discovery of vast quantities of silver inthe United States (US) and various European colonies resulted in a decline in the relativevalue of silver to gold. Suddenly the standard currency of India could not buy as much fromthe outside world. This event was known as “the fall of the Rupee.” The event of fallingIndian Rupee became more critical. Among the earliest issues of paper rupees were those bythe Bank of Hindustan (1770-1832), the General Bank of Bengal and Bihar (1773-75, establishedby Warren Hasting) and the Bengal Bank (1784-91), with the discovery of more and moresilver reserves; those currencies based on gold continued to rise in value and those based onthe silver were started declining due to large discovered silver reserves.

India was the special case, which carried out most of its trade with the gold basedcountries. As the prices of silver continued, so did the exchange value of Indian rupees(Bridge, 1981). Even after the independence of India in year 1947, condition became impossible,the process of devolution of Indian currency did not stop. After independence, India faced twomajor financial crises and two consequent devaluation of rupees in the year 1966 and 1991.The rupee was officially devalued by 19.5% in two steps over 2nd-4th June 1991, from 20.5 to

S.M. Tariq Zafar and S.R. Sharma

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Global Journal of Business Management

24.5, in response to a severe Balance of Payment crisis when the country had reservesenough to pay for only two months of import. Now the question arises, has the rupee reallyappreciated? Since 1991 if go through we will find history of devaluation of rupee againstother currencies. In recent past from June 2000 to September 2003, the rupee depreciated by1.69 per cent against the dollar, by 24.13 per cent against the euro, by 12.19 per cent againstthe pound, and appreciated by 1.79 per cent against the yen during the period. Entire periodresult is mixed, with the rupee appreciation by 7.30 per cent against the dollar, and depreciatingby 18 per cent against the euro, by 6.12 per cent against the pound and by 7.28 per centagainst the yen. Table 1 indicates the brief history of devaluation of Indian currency to the USDollar.

Table 1: History of Devaluation of Indian Rupees to Dollar

Period Range and % Change Period Range Max Depreciation

August 91-March 92 25.60 - 26.00 (1.56%) End March 92 25.95 - 30.55 17.73%April 92 - Jan 93 30.55 - 31.75 (3.93%) February 93 31.30 -33.59 7.32%March 93 - August 95 31.37 - 31.96 (1.88%) Sept 95 - Feb 96 31.89 - 38.55 20.88%July 96 - August 97 35.50 - 35.90 (1.12%) Aug 97 - Aug 98 35.70 - 42.76 19.78%August 98 - March 2000 42.45 - 43.61 (2.73%)

Source: Kshitij Consultancy ServiceAs can be seen in the table that rupee has followed a pattern of sudden and large

depreciation. But, there have been two notable exceptions to the above pattern. After the20.88% fall in the Rupee over Sept 95 to Feb 96, the Reserve Bank of India (RBI) imposed anumber of severe restrictions on the market and sent overnight money market rates soaring toalmost 100% to stop the Rupee from falling further. The currency gained strength, from 38.55to 34.30 before falling again to 35.70 where it settled upto August 1997. Again in January,1998, after a 13.45% fall in the Rupee in the wake of Asian crisis, the RBI rolled back interestrate cuts, imposed a number of severe restrictions on the market and sent overnight moneymarket rates soaring to almost 100% and stop the Rupee from falling further. The currencygained strength, from 40.50 to 38.30 before falling again to 39.55 where it settled. Thereafter,the Rupee again flared up, to 42.76, as a reaction to the US Sanctions and Ratings downgradein the aftermath of the nuclear tests. RBI again imposed restrictions on the market andintervened in the market to keep the Rupee steady. The successful float of the USD 4 billionResurgent India Bonds issue was a major factor shoring up the country's Foreign ExchangeReserves (Forex Reserve) in that trying time. The dust having settled, the Rupee has slowlylost ground, from 42.45 (August, 1998) to 43.61 (March, 2000).

The almighty of dollar proved to be vulnerable after all and created new debate to finddollar substitute. In 2002, the rupee started with a bearish trend and slowly breached the 49 adollar level in June and considered to be second most appreciating currency against the US


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Vol. 2, No. 1, June, 2008

dollar among the currencies of Bric nations, with a surge of close to 11% in 2007, way aheadof China's Yuan Renminbi, which gained about 6 % in the period according to an analysis ofthe exchange rates in the four countries versus the US greenback. Russian Ruble has alsoseen a rise of 6% in the same period however Brazil has registered a faster surge of about16% in its currency. At that point in time, it was felt that Rs. 50 to a dollar was very much onthe cards. It was expected that the level would be reached by Diwali. But then came thereverse trend as the rupee started gaining strength and gained steadily to touch a high of 47.97pre-Christmas and closed the year at 47.92. This was totally unexpected but this was achievedlargely due to the Reserve Bank of India which was continuously monitoring and buyingdollars at regular intervals to control the speed of reverse volatility (while strengthening),especially during the last quarter of the year. This is the first time when exporters were caughtunaware by the steady strengthening of the rupee and rising rupee spoiled exporters party in2007. Though the rupee's appreciation vis-a-vis the dollar started from August 2006, it is Maythis year that exporters began to feel the pinch. Over all the domestic currency has gainedaround 15% since August last year. Since the beginning of 2003, the rupee rose 4.6 per centagainst the dollar. But Indian rupee has been largely volatile since 2004 to 2006; traded in awide range between 43.2 to 46.3. A host of factors viz., rising crude prices, widening tradedeficit and international currency trends, have governed the movement of the Indian currencyduring this period.

Sudden Upward Trend of Indian Rupee

When the economy of a country performs positively, currencies appreciation is obviousand thus, rise in values is a cause for joy and celebration for respective countries. The suddenupsurge in the value of the Indian rupee in the closing stage of the financial year 2006-07 tookmost market players by surprise matter of fact it is a result of forces of demand and supplyoperating in the forex markets and involve no cost to the exchequer. The high decibellamentation over the rupee's appreciation, therefore, needs closer examination. In both periodsthe rupee appreciated only against one of the major international currencies in which India'sforeign trade is mainly denominated. The rupee is now seen to be fairly valued on tradeweighted REER terms.

The rupee in a week's time has strengthened by around 1.6 per cent against the US dollarand resulted more than 15% raise against dollar in last one year. On April 16th, 2007 rupeequoted at its nine years high against the dollar at 41.86. Surprisingly in the end of May 2007,dollar strengthened quite significantly against almost all the currencies, but it quite failed toimpress the rupees. In the mid October, it was claimed that Indian rupee has been appreciatedby 20 per cent from Rs. 49 a dollar in the year 2002 to Rs. 39 a dollar. Most of theappreciation (11 per cent) has happened since March 2007. The graph below shows thehistorical exchange rate between the Indian Rupee and US dollar between 26 September 2007to 26 October 2007.


25


Graph 1: Indian Rupee to US Dollar

Further, Association Chamber of Commerce and Industry of India (Assocham) is predictingthat rupee may extend gains to 37 against the dollar the highest in more than a decade byMarch 2008 (Nagarajan and Bloomberg, 2007). DBS has also upgraded its rupee forecast to37 per dollar by the end of year 2008 (DBS, 2008). But in the wave of sharp appreciation ofIndian Rupee, one noteworthy fact appears to have been missed by most. Barring theMalaysian Ringitt, Indonesian Rupiah, China's Yuan, Brazilian real ,Russian rouble and currenciesfrom a few strife-ridden areas, almost every other currency has gained against the US Dollar.It lost its competitive strength against euro by 12 per cent. With a weaker dollar and rising riskappetite of global investors being dominant themes in the global foreign exchange markets,emerging market currencies are facing the heat of appreciation and lead to rise in externaldebt and these dogma became food for defensive thoughts. As the US dollar weakened,domestic firms increased overseas borrowings and NRIs sent back more money. (Table 2).Table 2 indicates position of emerging Market Currencies against the Dollar between 6th Nov2006 to the current position Dec 2007.

The US Federal Reserve's decision to cut the benchmark interest rate and the discountrate by 50 basis points each, in September 2007, triggered a huge in the dollar vis-à-vis mostcurrencies. Emerging markets, which has come into the limelight in July this year, as a fall outof the swindling risk appetite from global investors, have now resumed the position of beingrecipients of forex inflows? It also needs to be noticed that none of the central banks inemerging markets have enforced any change in their benchmark rates, so as to discourageforeign investors yet. Thus, most currencies have seen sharp appreciation against the dollar inthe past few months. But, Indian Rupee, Thai Baht and Brazilian Real are only the currencieswhich rose by more than 10 per cent against the dollar since the beginning of 2007 (Iyer,2007). Among all, Indian is interesting case as Indian rupee has risen by 12 to 15 per cent


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Vol. 2, No. 1, June, 2008

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27


against the dollar since April 2007. The local currency, which has always been trading abovethe 40-marks for almost the decade now, managed to breach this level to trade at sub-39levels since late September 2007. It is also interesting to note that during the first half of 2006,Indian Rupee appreciated not only against the US Dollar but also against the Pound, Euro andYen by 8 per cent, 6.9 per cent and 11.2 per cent respectively.

FACTORS BEHIND APPRECIATION OF INDIAN RUPEEWhile appreciation is a perfect fine art, knowing how to accept appreciation in dignity and

grace is an even greater art. Generally, there may be several reasons behind the appreciationof any currency. It appreciates when economy doing well and the rise in their values is butnatural. The high value of the deutsche mark when Germany was the trendsetter for theworld economy in the 1960s and the 1970s, the value of the yen in the 1980s when Japan Incseemed set to take over the world and the dollar's high value in the later 1990s when the USnew economy brooked no competition were sources of immense pride for their respectivecountries and presently India enjoying favourable situation to an extent.

As the Indian Rupee has appreciated significantly against the US Dollar especially, it isobvious to understand why Rupee is appreciating.Very first the US dollar is the world tradingcurrency which means all goods and services are prized in US dollars. With a US dollardevaluation by 25 per cent over the past five years, the impact on international trade is autotremendous. Any country trading with the US will immediately raise their prices in anticipationof the devaluation and foreign investors will start reshuffling their portfolios, moving into euros,ponds and emerging currencies. Secondly Dollar is reserve currency, since no currency is fullybacked by gold or silver at present, the US dollar is regarded as world reserve currency. Thedecision was result of the Bretton Wood agreement signed after World War II and means thatvarious nations' Central Banks, which constitute money for the countries , must have theircurrency backed by the US dollar and must hold US dollars and treasury instruments. Itserved the same purpose as gold & silver in backing the currency. This arrangement is goodas long the dollar holds its value. But dollar is a fait currency and has no precious metalsbacking it and is accepted by faith. The only currency that has maintained intrinsic charm andvalue for the last 5,000 years is gold and silver.

In case of India, it is really very difficult to say exactly that this is the main factor behindthe appreciation of Rupee. In fact, it is a result of combination of many factors and coordinationof positive policy implementation. First, it is to be noted that appreciation or depreciation ofany currency (e.g. Rupee), as the case may be, is not all of sudden but more and lessinfluenced by the strength and weakness of competitive currency advantage (e.g. US Dollar).In the light of this, must be noticed that the appreciation of Indian Rupee to 43.50 in the latterhalf of 2004, was largely attributed to the weakness of the US Dollar against the majorcurrencies such as the Euro and Yen. Now, the situation is almost same as it was in 2004.Dollar is growing weak against many emerging market currencies and developing dilemma to


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Vol. 2, No. 1, June, 2008

substitute it as reserve currency. Second, the moment of capital in papers (debt and equity)also plays a dominant role in determining the exchange rate. The rise in external commercialborrowings, multilateral debt, deposits by non- resident Indian, short-term loans also contributeto the situation. To finance investment and acquisition abroad, Indian companies borrowedmoney overseas which returned back to India boosting capital inflow.

During the first half of 2007 -08 external debt raised by 21 billion dollars against 1696billion as on March 30-2007. Of this 7 billion dollars was accounted for by the depreciation ofUS dollars in the global market. Further, in the past couple of years, despite the trade deficit,Rupee has been appreciating largely due to money being poured into Indian equities byForeign Institutional Investor (FIIs). Recently, the fed rate hike and outflow of money by theFIIs have not only impacted the Indian stock market but also the Indian Rupee. The huge FIIsinflows into financial asset markets, and increasing reliance on low cost foreign loans beenapproved by RBI add to the supply glut, and help power the rupee higher.

Table 3 Indicates the inflow of FIIs into India compared to other Asian Countries in 2007(US$ Million) Normally.

Table 3: FII Inflow into India Compared to other Asian Countries

Year India Indonesia Korea Philippines Taiwan Thailand

2001 555.29 311.14 1,705.38 29.8 3,268.44 -1402002 708.83 882.31 -2,693.85 -47.86 -178.63 314.712003 6,355 1,107.7 11,367.2 -80.7 12,840.1 -483.52004 82,44.1 2167.1 8,791.7 317.2 6870.3 40.72005 11,614.3 2,272.9 -4,865.9 350 20,930.7 2,841.42006 7.768.6 1945.2 -12,070.6 1,126.1 16,924.4 1,878.82007* 13,692.5 2,984.7 -16,541.7 1,659.5 5,980 2,948

Total 48.938.6 11,671 -14,307.8 3,354.3 66,635.3 7,399.3

Note: Till September; Figures for China not available.Source: Industry

Table: 3 Depicts that India is perhaps getting the largest chunk of foreign flows (Chinawould be getting more, although no figures are available), but other emerging markets too areawash in cash.

Third, investments and remittances by Indian settled abroad owing to attractive interestrate in India. Fourth, the heartburn on the Rupee's appreciation against the dollar is due to thefact that most of India's external trade is invoiced in dollars and any change in the dollar'srupee value has disproportionate effects on the various stakeholders in the rupee's externalvalue such as importers, exporters, borrowers, lenders and consumer of imported goods


29


(Varkey, 2003). The differing impact of the changes in the Rupee's value on various stakeholdersexplains the sudden outcry against appreciation. Importers and borrowers in foreign currencyare delighted with the rupee's appreciation to the dollar as most imports and external borrowingsare denominated in dollars.

The Rupee’s appreciation is also a result of forces of demand and supply operating in theforex markets and involves no cost to the exchequer. Fifth, interesting to note that on thecontrary Indian Rupee has depreciated against the EURO and GBP (Great British Pound), soit would not be prudent to say that the rise in Rupee is purely based on economic growth ofIndia in fact it is because of short-term recession in US. The graph below shows the historicalexchange rates between the Indian Rupees and EURO between 27 September to 26 October,2007.

Graph 2: Indian Rupee to 1 Euro

Lastly, the policy of Reserve Bank of India is a subject of discussion. It is to be noted thatcomparison to currencies like Dollar and Euro, which are determined by the market moments,the Indian Rupee is partially managed by the RBI. The Balance of Payment crisis is 1990s,wherein the Rupee was devalued is a case in point , Asian crises period from 1998 to May2002 other major currencies remained steady while the rupee depreciated by about 25 percent to the dollar. The RBI has also off and on, intervened in the Indian currency market,when the Rupee has exhibited signs of extreme volatility. For example, towards the end of2004, when the EURO and Asian currencies such as Japanese Yen appreciated sharplyagainst the US Dollar, it was the RBI intervention that keeps the Rupee from appreciating in asteep pace. Now, leaving the Rupee appreciate make feel that RBI is happy to leave theRupee appreciate in the future and the clamour for government intervention to depreciate therupee seems overdone. This is mainly because of the fact that imports would be cheaper and


30

Vol. 2, No. 1, June, 2008

India imports more than exports. There are other goods like Gold and Crude Oil which wouldbe cheaper and impact inflation to reduce it. The effects of the rupee's appreciation is notmarginal as according to the World Bank. Eventually, the rupee with centuries of historybehind it, is capable of depreciating with elegance and appreciating with distinct grace. Thegrace will continue if we support our positive economic policy with prudent implementationand proper utilization of entire available resources.

IMPLICATIONS ON INDIAN ECONOMY1. Whenever currency of a country moves up, it is usually implicit that the economy of

the country is doing well. The rupee against the dollar has appreciated from Rs. 45.84 inNovember 3, 2007 levels to happened since March 2007. Appreciation of Indian Rupee hasmany impacts. On the one hand rising rupee will make imports more attractive leading toincreased demand for foreign currencies and eventually a fall in the value of rupee and onother hand it helps importers to buy goods and services at the cheaper rate than earlier, itmeans much needed public money would go to transforming cash flows from importers andconsumers to exporters leading to a misallocation of resources. This complexity is vital for adeveloping economy like India that relies heavily on imports. While exports have picked upstrongly in the last two years so have the imports and this is good indication for Indianeconomy as higher imports also mean increased economic activity. However, as the rupeecontinues to rise, the demand for intervention are likely to become shriller. An artificiallymanaged depreciation would result in higher cost to Indian importers and to the consumer inexchange for a probable boost to exports. Table 4 indicates picture of rising imports andreducing exports.

Table 4: Rising Imports and Reducing Exports

Export September, 07 August-Sep, 072006-07 10.73 60.98

2007-08 12.80 72.28Growth (%) 19.26 18.52Import September, 07 August-Sep, 072006-07 16.83 87.012007-08 17.22 109.20Growth (%) 2.31 25.51

Trade Deficit September, 07 August-Sep, 072006-07 6.10 26.022007-08 4.42 36.92

Note: Figures in $ Billion; Source: Commerce Ministry


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2. Foreign funds have been flowing in since liberalization in 1991, but most of the dollarswere bought by the RBI which did not allow the rupee to appreciate. When RBI buy dollars,rupee supply goes up in the market, leading to inflationary trends. With the inflation around 6.5per cent in January-March 2007, RBI decided not to buy dollars. Now only those who need toimport buy dollars and RBI intervenes only selectively. So the demand for greenbacks dippedconsiderably while supply has increased. As a result the dollar became cheaper.

3. Exports during August, 2007, were valued at US $ 12686.38 million which was 18.91% higher than the level of US $ 10668.78 million during August, 2006. In rupee terms, exportstouched Rs. 51787.31crore, which was 4.31% higher than the value of exports during August,2006. Cumulative value of exports for the period April-August, 2007 was US$ 59483.99million (Rs. 243611.53 Crore) as against US$ 50255.50 million (Rs.230788.99 Crore) registeringa growth of 18.36% in Dollar terms and 5.56% in Rupee terms during the same period lastyear.

4. Imports during August, 2007 were valued at US $ 19569.31 million representing anincrease of 32.64 % over the level of imports valued at US $ 14753.47 million in August, 2006.In Rupee terms, imports increased by 16.35 %. Cumulative value of imports for the periodApril-August, 2007 was US$ 91986.78 million (Rs. 376964.85 Crore) as against US$ 70181.41million (Rs. 322203.73 Crore) registering a growth of 31.07% in Dollar terms and 17% inRupee terms during the same period last year.

India imports three-fourths of its oil. As the value of dollar goes down, importing oilbecomes cheaper. Since oil prices are directly related to rise in prices of other goods andcommodities in India, their prices will also fall down. Appreciation of rupee could be boon foroutbound tourism sector. According to travel industry experts, this could generate positivesentiments among the people travelling to all destinations, especially the US. Added to this,foreign studies could be cheaper now, as a result there could be an increase in the number ofIndian students willing to pursue study abroad. Further, appreciation of the Indian Rupee helpsin easing the pressure, related to foreign debt servicing (interest payments on debt raised inforeign currency), on India and Indian companies. With Indian companies taking advantage ofthe United States soft interest rate regime and raising foreign currency loans, known asexternal commercial borrowings, this is a welcome phenomenon from the point of view oftheir interest commitments on the loans raised. This will help them avoid taking a bigger hit ontheir bottomline, which is beneficial for its shareholders. Last but not the least, considering thatthe government has been selling its stake aggressively in major public sector units in the recentpast, and with a substantial chunk of this being subscribed by FIIs, the latter will have to saleout more dollars to pick up a stake in the company being divested, thus, aiding the governmentsbuild up of reserves.

As appreciation and devaluation of currency has strong implications on imports andexports, Indian exports sectors are feeling the heat of strengthening rupee. Surprisingly


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appreciation of rupee has meant dwindling margins for the exporters and in the face ofincreased competition from other low cost countries from Asia, has dealt a blow to bothservices: information technology and merchandise exports. Given the fact that 76 per cent ofIndian export markets is to the US and IT companies have more than 60 per cent of theirrevenues from the US. According to Satyam Official one per cent change in rupee will hit theoperating margins of IT companies for FY 2008 to 30-50 basis points (Kumar, 2004). A strongrupee is expected to affect the fourth quarter results of these companies adversely. Analystsexpect software firms to report 1-2% lower operating margins on account of strong rupee.Analysts are sure that the surge in the rupee will depress profits of the top IT companies likeit did in the past few quarters. In Q3, when rupee appreciated 3.8%, Infosys' operatingmargins was affected by nearly 200 basis points and caused a revenue loss of Rs 146 Crore.Wipro suffered a margin squeeze of 60 basis points. But according to recent software industryreport, software companies are still able to maintain their profitability; but if the rupee willappreciate with this pace then surely it will happen. Table:5 indicates that IT companies arestill performing satisfactorily .

5. However no immediate effects have noticed on this sector due to appreciation ofIndian Rupee.

6. However, the companies like Infosys and Wipro declined to comment on the issue asthey are observing a quiet period before the announcement of annual results mid-April.

7. If we take a look at the operating metrics of the top four IT companies TCS, Infosys,Wipro and Satyam-it clearly shows that they have been able to manage growth in a seasonallystrong quarter by lever aging on their strengths.

Table 5: Performance of Top Indian IT Companies

TCS Infosys Wipro Satyam

Revenue (Rs. Crore) 5,640 4,106 3,249 2,032

Net Profits (Rs. Crore) 1,247 1,100 727* 409

Net Margin (%) 23 27 NA 20

Net Employee Addition 9,268 4,530 4,463 3,307

Attrition (%) 12 14 18 14

Note: All metrics for Q2, 2008; *Operating ProfitsAnother area of concern is the impact of appreciation of rupee on Indian BPO (Business

Process Outsourcing) sector. India is still the most attractive outsourcing destination for globalcompanies. But, India may lose it due to appreciation of currency (Nasscom) coupled with theimposition of Minimum Alternate Tax on IT firms introduced this fiscal year. Evidently, lots ofcompanies including India's largest software exporters have already started looking outsideIndia for outsourcing work.


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According to a press release, TCS would hire 5,000 people in the Maxico over the nextfive years serve the US clients, as the labour costs at home were rising . US based SpectrumGlobal Fund Administration, providing back-office operations to hedge funds in the US and theUK, is closing its facilities in India. The company had started its operations in India two yearsago. BPO experts said that a 1 per cent rise in the rupee can impact profit margins on US-based processes, which are paid for in dollars, by 50 basis points, and this in turn has affectedsalaries. "Salary hikes in the BPO industry have dropped to 10-15 per cent in the last threemonths, compared to 20-25 per cent earlier. Attrition rates for US based processes are alsorising as employees try to find jobs in the processes outsourced from the countries other thanthe US, such as UK. Thus, it will affect employment creation in the BPO sector in a big way.Our young people coming out from colleges in the next 2-3 years are going to lose out in largenumbers and they will have to look for another sector. Knowledge Process Outsourcing(KPO) firm Evalueserve is going to set up a delivery centre.

8. In the Budget this year, it has been announced that the income eligible for tax holidayunder Sections 10A and 10B henceforth will be considered in the computation of 'bookprofits' for the levy of MAT. The extension of minimum alternate tax to the profits of InfotechCompanies could see several players in the sector shell out more tax next fiscal. TCS, India'sIT largest company, will have to provide for Rs 50.9 crore even at 2005-06 profit levels. Wiprowill pay Rs 106 Crore more on FY2006 profits, while Satyam Computer will contribute anadditional Rs 73.3 Crore. While Wipro shares plunged by 7 per cent on the bourses, TCS wasdown 6.3 per cent, Infosys 5.55 per cent and Satyam, 9.8 per cent. Currently, exemptionunder Section 10A is available to units set up in software technology parks. While the marketwas expecting extension of this Section for another 5-10 years, the Finance Minister made nosuch announcement and the benefits therein expire in 2009.

9. Several IT and BPO firms in Bangalore have decided that their employees will have towork on Saturdays too in order to counter the negative impact of the appreciating rupee. Itmeans not 'Saturday Night'. BPO employees are, however, not happy with the idea and saythat this will only add to work pressure. They argue that this move is unfair as they were notallowed to relax when the rupee was not so strong.

10. Knowledge Processing Outsourcing (popularly known as a KPO), calls for theapplication of specialized domain pertinent knowledge of a high level. The KPO typicallyinvolves a component of Business Processing Outsourcing (BPO), Research ProcessOutsourcing (RPO) and Analysis Proves Outsourcing (APO). KPO business entities providetypical domain-based processes, advanced analytical skills and business expertise, rather thanjust process expertise. KPO Industry is handling more amount of high skilled work other thanthe BPO Industry. While KPO derives its strength from the depth of knowledge, experienceand judgment factor; BPO in contrast is more about size, volume and efficiency. In EasternEurope in an attempt to reduce dependence on India and to tap better market in the region.The KPO outfit would also go for a public issue in 2009 with UK so far the leading contender


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for the listing. Evalueserve has centres in India, China and Chile. About 1,900 of its 2,100employees are currently based in India. Further the study of Nasscom revealed that BPOindustry has been affected more than the IT industry because BPO has very little on-sitepresence at client locations in the US. Apart from IT and BPO sector, large sized companiesfrom other sectors are also realizing the negative impact of appreciation of rupee on theirexport performance as well as profit.

Auto exports companies are most affected by appreciation of rupee. With domestic salesslowing, they would have liked to focus on exports, but lower margins are making that anunavailable business. Now these companies are re-negotiating raw material prices and logisticscost. Announcing its result, Maruti Suzki India admitted that its bottom line had been impactedby the stronger rupee. The rupee's appreciation is impacting two-wheeler companies. Table 6indicates auto export in the slow lane (in %).

Table 6: Auto Exports in Slow Lane

Vehicles/Wheelers April-September 2006-07 April-September 2007-08

Passenger Vehicles 13.15 1.48Commercial Vehicles 27.80 16.533-Wheelers 57.66 11.592-Wheelers 37.08 22.98

Source: Industry

TVS Motors, which exports to Latin America, Africa and Asia, said that it is alreadyfeeling pinch. Notably, margin of TVS Motors have gone down 4 to 5 per cent on a conservativeestimates. The company had set an export target of 500.000 two wheelers by 2010. Keepingin view the reduced profitability of Indian auto export sector, the automobile association ofIndia is already lobbying the government for more incentive. Auto part manufacturer are alsofinding the going tough. They have started losing orders , as their products are more expensivethan those offered by the competitors in China and Brazil. In the other merchandise exports,what is really squeezing the exporters is the fact that currency of competing Asian currencieshave done better against the dollar over the last year. For instance, Chinese Yuan hasappreciated 4.6 per cent only and the Pakastani Rupee and Bangladeshi Taka have actuallydepreciated by 1.4 per cent and 0.43 per cent against the dollar, respectively making theirexports more competitive. The impact of this has been sharp, particularly in the sectors liketextiles, leather and handicrafts, which have a low percentage of imported materials andhence, do not have a natural hedge against a rising rupee.

11. Taxtile companies based in Gurgaon are sending their workers on 45 days leavewithout pay before the festival, while those in Tripura, Tamil Nadu, have not renewed thecontracts of over 8000 workers. All expansion plans have been hold and order for new


35


machinery is being revoked. And it is not only the profitability of the exporters that has beenimpacted; their order books have also taken significantly hit. Several producers are shiftingtheir production base overseas. They are finding better to manufacture in the countries likeChina, Indonesia, Bangladesh and Vietnam. Some textile companies have already startedimported fabric from China, Bangladesh and Pakistan at prices that are 15-20 per centcheaper than the domestic prices (Janve, 2007). Given the erosion of profitability in small andmedium companies due to the sharp appreciation in the rupee, it is not surprising that thecompanies with the sales less than 1 Crore have shown the maximum decline in businessconfidence. The BCI (Business Confidence Index) of these companies has fallen by awhopping 16 per cent in the June quarter. Other export intensive sectors like chemicals andengineering are also badly affected. Light engineering companies have been affected by therising costs of inputs like crude oil and steel. This combined with the stronger rupee (abouthalf their invoice is done in dollar) have already inevitably meant that their bottom line havebeen hit hard. The chemical industry faces the similar problems. On the one hand, the cost ofraw materials like Benzene and Sulpher have shot up globally; on the other hand, it facestough competition from cheaper Chinese exports in basic product categories like dye stuffintermediaries, pigmented intermediaries and agro chemical intermediates. Interestingly, eventhe gems and jewellery sector, which has high level of imported raw material (almost 70 percent) is also feeling the adverse effects of the hardening rupee. Their problem is that they paidupfront for their raw materials and the entire business cycle till the delivery of finished goodsin the export market takes about six months to eight months. Result, they paid for their inputsat much higher rupee rates and are now delivering to customers at significantly lower rates ineffect ruling out any advantage of currency appreciation. Thus, rising rupee is the problem ofplenty and badly affecting the Indian economy.

CONCLUDING REMARKSReserve Bank of India is allowing the rupee to rise as it anticipates to control the

inflation. This mean they will hold of any Interest Rate increase thus, consequently marketforces will soon correct the imbalance arising out of the rupee current rise. It is in India'sinterest to allow further appreciation of the rupee and in the long-term move towards ever-greater liberalization of capital flows, keeping in view that inward flow of foreign currency willnot continue indefinitely, debts and loans will have to be paid and will lead to reverse of FIIs,according to Edwin M. Truman, Senior Fellow at the Institute of International Economics,Washington. Intervening to artificially depreciate the Indian rupee will involve outlay of publicfunds, which can be better used elsewhere. This is money that could be better utilized indeveloping infrastructure (roads, electricity, and airport). Better infrastructure would in turnlead to lower input costs for firms. Thus, further lessening the impact of the rising rupee and inthe process improving the quality of life. Therefore it is the time to reap the benefits ofappreciation.


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The strength of Indian rupee is an indication of underlying strength of the introspectiveeconomy. The appreciation of rupee is likely to lead to disastrous consequences as manycountries have realized. The decibel lamentation over the rupee's appreciation, therefore,needs closer examination. In the medium to long-term, with global market mechanisms inoperation, a rising rupee should lead to decreased costs and hence, a marginal impact on ourglobal competitiveness. The rising rupee, however, does throw up the challenges in the shortterm and there in lie opportunities though it is now seen to be fairly valued on trade weightedREER terms. For example, in case of IT sector, the appreciation of rupee will force Indian ITsector to look beyond the labour cost arbitrage to create value to its customers; and will forcethis sector on driving new efficiencies and improving productivity to remain competitive in theglobal market. And notably, this is something what some Indian IT companies have alreadyadopted and other are planning. For other sectors also, to combat this trend, new businessstrategies are needed. For example, textile and leather industry should think about importingcheap raw materials; and also try to expand their portfolio and shift to higher value additionproducts that enjoy better margins.

Companies should also think about the strategy of price negotiation. But, the real problemis with small and medium enterprises that account for almost 70 per cent of India's export.Unlike bigger companies, most of them are unable to effectively hedge their currency exposure.The problem is compound with the fact that bankers do not want the smaller players to hedgebecause of high risk involved and most of them are also not informed about the mechanism ofhedging itself. These industries should try to focus on the domestic market and try to reducethe operational costs. At the government front, the idea of the curbs on External CommercialBorrowings (ECB) needs to be looked within a framework which takes into account theexisting realities of the country. These realities include the fact that India is not yet ready foran appreciating currency especially when we consider the small scale exporters of the countrywhose contracts are not hedged. In the end, one should consider the fact that the move is notmotivated by the now rampant populist politics of our political class but solely by the structuralchanges in an increasingly globalized economy. The rupee, with centuries of history behind it,is capable of depreciating with elegance and appreciating with dignity and grace. If only wewould let it. With the rising rupee, Indian economy has much to gain and little to lose in thelong run.

Acknowledgment: Mistakes are part of human nature and thus solemnly we accept fullresponsibility for any remaining mistakes, We wish to thank Prof. S P Singh , VBS PurvanchalUniversity and Prof. Imran Salim “HOD Jamia Hamdard University” for going through inprocess versions of this paper and giving positive comments.

REFERENCESBridge, Carl (1981). Britain and Indian Currency Crisis, 1930-2: A Comment. The Economic History

Review, 34, 301-304.


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Davies, Roy & Davies, Glyn (1996). A Comparative Chronology of Money: Monetary History fromAncient Times to the Present Date, Cardiff: University of Wales Press.

DBS (2008). India Rupee Seen Rising to 37/Dollar By End 2008. International Business Times,Iyer, R. Preeti (2007). When Dollar Takes a Back Seat. The Economic Times, October 17.

Janve, Rupesh (2007). Strong Re Weakens Textile Industry. Business Standard, 29th October.Kumar, Rishi (2004). Rupee Strength Sets Off Alarm Bells. Business Lines, March 29, accessed on http://

www.thehindubusinessline.com/2004/03/29/stories/2004032900710200.htm

Nagarajan, Sam & Bloomberg (2007). CEOs Expect Rupee to Breach 37 Against Dollar by March, SaysSurvey. The Wall Street Journal, October 27.

Varkey, Abraham (2003). Accept Rupee Appreciation Gracefully. Business Line, November,6.


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