1. IMPACT OF RUPEE DEPRECIATION

2.  What is a foreign exchange rate? A foreign exchange rate expresses the number of units of the home currency which have to be provided to buy one unit of the foreign currency. Likewise, it can also express the number of units of the home currency one will get upon selling one unit of the foreign currency. The former is called the buying rate and the latter the selling rate. The buying rate is higher than the selling rate. For example, to buy US $ 1 from an authorized dealer (bank) one will have to provide INR 66. This exchange rate is shown as INR/US$ = Rs 66.

3. IMPACT OF RUPEE DEPRECIATION

4.  An Indian importer has to pay its supplier in foreign currency so it must buy, say US$, at the buying rate and pay the supplier.  An Indian exporter receives payment in foreign currency, say US$, for the goods/services supplied. It cannot use US$ in India so it must convert the US$ by selling it for Indian rupees at the selling rate.

5. IMPACT OF RUPEE DEPRECIATION  Depreciation or Appreciation of a currency occurs when the exchange rate of the home currency against the foreign currency is allowed to ‘float’ or fluctuate depending upon i) the demand and supply of the foreign currency in the home country and ii) the economic conditions in the home country in terms of inflation, interest rates, CAD, etc. This is referred to as a floating currency regime. India follows this system.

6. IMPACT OF RUPEE DEPRECIATION  If the Indian rupee depreciates against the US$, it means one has to provide more Indian rupees to buy one US$. If the Indian rupee appreciates, it means one has to provide less Indian rupees to buy a US$.  In the earlier slide one witnessed the continuous depreciation of the Indian rupee against the US$ from Rs 45 to Rs 66.

7. IMPACT OF RUPEE DEPRECIATION  Theory of ‘J’ Curve: This theory states that a country’s trade deficit, that is, the value of imports being more than exports, will worsen (become more negative) initially after the depreciation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports in the short term. For example, contracts to import petroleum are usually in US$ and medium term; the contracted quantity cannot be changed but with depreciation of the Indian rupee, Indian rupees per barrel of oil become more expensive and more Indian rupees spent for imports. A cut in the quantity of imports will take place but only after a time lag.

8. IMPACT OF RUPEE DEPRECIATION  On the contrary, exports become cheaper and more competitive. The effects of the change in price of exports will not happen immediately but eventually and induce an expansion of exports but with a time lag.  Due to the above effects, the balance of trade initially declines and then begins to improve after some time in the form of the letter ‘J’.  However if the volume effect is greater than the price effect in the short term, the import bill falls sooner and the balance of trade improves quickly. This is called the Marshall-Learner condition.

12. IMPACT OF RUPEE DEPRECIATION  If an importer finds that the cost of imported inputs like raw materials and components has increased significantly due to currency depreciation, and cannot be passed on to the customer, his profit margin will be reduced. The importer will then look out for ways to reduce the cost of imported inputs by sourcing alternative suppliers or go for import substitution with indigenous/local materials.

13. IMPACT OF RUPEE DEPRECIATION  If a manufacturer is neither an importer nor an exporter, his business will not be directly affected by currency depreciation but indirectly as the entire industry and economy will be affected by depreciation of currency in some way or other, for example, transportation costs are likely to increase with increase in imported price of crude petroleum.