Rising rupee not an unmixed blessing.
Posted by cvbasheer on January 20, 2010
Currencys strength more due to dollars weakness and large FII inflows.
On January 11 the rupee closed at a 16-month high of 45.34 to the dollar in the inter-bank currency market. At the end of last year (December 31) it was at 46.54. A dollar would have fetched Rs.1.20 less in ten days. In other words, fewer rupees would be needed to acquire dollars.
The rupee has been appreciating since April 2009, but the trend has become more pronounced recently. In the new year, the appreciation has been particularly sharp, by 2.6 per cent in 10 days.
Obviously such a sharp rise in the rupees external value has major implications. Exporters will be hard hit as their competitiveness will be eroded in the global markets. These have started picking up only recently after more than a year of decline. The government had given a number of sops to export sectors to counter the fall in demand in importing countries. A new package has just been announced. Exporters of services including IT services have had to reckon with a strong rupee. A large portion of their billings is in dollars: they will consequently fetch fewer rupees.
Importers, on the other hand, stand to gain by the strengthening rupee. However, the petroleum import bill, forming a significant part of the overall import bill, may not see a sizable saving: high petroleum prices may offset the advantage in foreign exchange rates.
There are a number of issues connected with the rupees rise. Does it reflect the economic strength of the country at this juncture? Are there limits to policy intervention to maintain the rupee value at particular levels? The rupees strength is more due to the weakness of the dollar over a fairly long period. Over a much narrower time span, the American currency has recently been under pressure in relation to most Asian currencies. The Korean won, the Thai baht and the Malaysian ringgit have all appreciated against the dollar recently. This phenomenon is attributed to the fact that these Asian economies have rebounded sharply in the post-recession period. Read Morehere: http://www.hindu.com/biz/2010/01/18/stories/2010011851211300.htm