Impact of dollar fluctuations on the Indian economy

Indian foreign exchange rate system   was on the fixed rate model till the 90s after that was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar.

Till 80s, India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last long because the oil price rise in 80s created a big gap in India’s balance of payment. This gap widened during Iraq’s attempt to take over Kuwait. Thereafter, exports also contributed to foreign exchange reserve along with Foreign Direct Investment into the Indian economy to reduced the BOP gap.

Indian rupee appreciation against dollar impacted heavily to the following:

1. Exporters
2. Importers
3. Foreign investors

Exports from India are of Diamonds, handicrafts, gems, jewelry etc. During the periods when the dollar was moving high against the rupee, exporters stood to gain, i.e. when $1 = Rs. 48, was getting them Rs. 4800 for every $100, if its value of rupee Rs. 39.35 = $1 as on, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike.

Imports to India are of petroleum products, capital goods, etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100.

Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like – Foreign investment of up to 51% equity limit in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special circumstances; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate.

Conclusion:-Appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. Can the Dollar remain king or not, is no longer a million dollar question, but a million Rupee question

Note:-

1.      Exchange rate – the rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another.

3.      Foreign exchange market – Also known as “Forex” or “FX”. It is a market to trade currencies