The Great Fall in the Value of Rupee !!!

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29th Aug 2018

The Great Fall in the Value of Rupee!

Of late we find a lot of news about the Indian Rupee becoming weak and getting depreciated and the  same is  being received by one section of the business people with  delight and by another with dismay! Yes, this amply goes to prove the statement “one man’s Food is another man’s Poison”. Why and how does this happen? And what precautions one has to take if he deals with Foreign Exchange particularly with U S Dollars for the business or for any other transactions like Medical treatment abroad, Travel or tour, education etc., necessitating buying or selling of foreign currencies  particularly U S $.

Recently Rupee has crossed the 70 Rs vs 1 U S $ -mark and has slightly pulled back  While Exporters, I T Companies, NRIs are the Happiest of the lot when Rupee weakens or depreciates, the whole lot of Importers, most particularly Oil companies and the Union Govt. with a lot of commitments of overseas debt payments and  debt servicing  obligations bear the brunt. The reasons could be manifold but primarily based on the principles of “Demand-Supply”  economic philosophy. Recently the fall was attributed to the  collapse of Turkish Lira. Turkey now suffers from high inflation, large Capital outflows and inadequate  Foreign Exchange Reserves.

Reserve Bank of India  vested with the powers to monitor and take timely action to stem the freefall of the value of Rupee  does intervene in the market by pumping in substantial Dollars into the market from its huge  reserves which is around  $ 400 Bn at present.

So people with medium and long term commitments towards payments to overseas entities  in Dollar terms need to  hedge their positions by taking the opposite positions by paying the requisite premium in Forward contracts.  So both importers and the exporters  need to be careful to protect their positions  as the FEX market of late has proved to be highly volatile and susceptible to multi various changes in the economy of not only domestic  country but also to external environment and changes in the  economic status of other countries too as it is contagion in nature.

Will the Rupee appreciate or depreciate more? It is a moot question. Dollar is strengthening fairly well with the policies of the Trump Govt. India’s  Fiscal deficit, widening Foreign Exchange related Trade deficit- BoP,  growing uncertainties in the economy etc., would greatly impact the possibilities of Rupee gaining any positive momentum in the short term. Strengthening Exports through policy changes and incentives,  promoting more FDI investments and focusing more on developing on emerging market economies etc. will be the need of the hour. Concrete and conscious steps –both on medium and long term– would only promote the strength of the economy per se leading to strengthening  the Rupee in due course.

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