Impact of rise in price of Indian rupee

against us dollar on petroleum industries

INDIAN ECONOMY:
The economy of India, measured in USD exchange-rate terms, is the
twelfth largest in the world, with a GDP of US $1.! trillion "#!!$%.

&1' It has a GDP growth rate of (.)* for the fiscal +ear #!!,-#!!..
&#' /owe0er, India1s huge 2o2ulation has a 2er ca2ita income of $),)# at
PPP and $1,!$( in nominal terms "re0ised #!!. estimate%.

&3' The 4orld 5an6 classifies India as a low-income economy.
Impact of dollar fluctuations on the Indian
economy :
Until the 70s and 80s India aimed at to be self-reliant by concentrating
more on imports and allowing very little exports to cover import costs.
However, this cold not last long becase the oil price rise in the !"70s and
80s created a big gap in India#s balance of payment. $alance of payment
%$&'( of any contry is the balance reslting from the flow of
payments)receipts between an individal contry and all other contries as a
reslt of import)exports happening between an individal contry, in or
case India and rest of the world. *his gap widened dring Ira+#s attempt to
ta,e over -wait. *hereafter, exports also contribted to ./ reserve along
with .oreign 0irect Investment into the Indian economy and redced the
$&' gap.

Indian rpee appreciation against dollar impacted heavily
to the following
!. 1xporters
2. Importers
3. .oreign investors
1xports from India are of handicrafts, gems, 4ewelry, textiles, ready-made
garments, indstrial machinery, leather prodcts, chemicals and related prodcts.
5ince the !""0s, India is the world#s largest processor of diamonds. *he mentioned
export items contribte sbstantially to foreign receipts. 0ring the periods when the
dollar was moving high against the rpee, exporters stood to gain, when 6! 7 8s. 98,
was getting them 8s. 9800 for every 6!00. 5ince the beginning of the year 2007,
rpee appreciated by abot !0:. ;ith its vale of rpee 8s. 3".3< 7 6! as on != >ov
2007, for every 6!00, exporters wold get only 8s. 3"3<. *his difference is towing
away the profit margins of exporters and $'& service providers ali,e
Imports to India are of petrolem prodcts, capital goods, chemicals, dyes, plastics,
pharmaceticals, iron and steel, nct precios stones, fertili?ers, plp paper etc. ;ith the
same scenario as given for export, if we analy?e - an importer is paying 8s. 3"3< now
instead of 8s. 9800 paid dring yester years for every 6!00. *his gain on ./ is li,ely to
create savings in cost, which cold be passed on to consmers, thereby contribting to
control inflation
.oreign investment into India is also contribting well to dollar depreciation
against dollar. ;ith the recent liberali?ed norms on foreign investment policy li,e @
.oreign investment of p to <!: e+ity limit in high priority indstriesA foreigners B
>8Is are allowed to repatriate their profits and capital with exception for Indian nationals
who were allowed to do so only nder special circmstancesA allowing free sage of
export earnings to exporters, made foreign investment in India very attractive. It is this
favorable atmosphere which made ./ reserve srpls in U5 dollar and helped rpee to
appreciate
Interference of RBI:
Reserve Bank of India intervened a number of times, and still continues to do so, to
try and keep a check on the appreciating rupee. What RBI does is buy out billions of
US dollars, which creates a temporary shortage of dollars there by increasing its
demand, which in turn strengthens the dollar. fter a few days there will be again a
large inflow of US dollars into India, and again the Rupee becomes stronger, and
again RBI interferes and buys out US dollars to keep the rising Rupee under check.
!his has become a routine now .
4hen India started li7erali8ed im2orts in 1((1, the 7iggest worr+ was that its
foreign exchange reser0es would 0anish in no time and it would 2erenniall+ 7e at
the merc+ of the International 9onetar+ :und and the 4orld 5an6. Its reser0es in
1((1 were 7arel+ enough to co0er 1 da+s of im2orts. Toda+, India;s reser0es
ha0e crossed $., 7illion. Instead of de2reciating, the <u2ee has gained a7out )
2er cent against the Dollar o0er the 2ast 1# months. India;s current account
7alance of 2a+ments shows a sur2lus for the first time in # +ears. Im2lications
for India;s econom+ ha0e 7een anal+8ed 7+ an eminent economic commentator,
which ma6es an interesting reading
"#!I"$ "% R&S&R'& B$( "% I$)I*
The <eser0e 5an6 of India has two o2tions. It can allow the <u2ee-Dollar rate to
7e determined 7+ the mar6et forces. Gi0en the current excess su22l+ of dollars,
the mar6et-determined 2rice of Dollar should fall. The other o2tion is to 7u+ u2
the excess dollars from the mar6et at some target 2rice and add to the stoc6 of
foreign exchange. :rom <s. #,.)! against a Dollar in 9arch 1((1, the <u2ee
came down to <s. )(.!$ to a Dollar in 9a+ #!!#. Since then, it has 7een going
u2 and is currentl+ around <s. ).
= rise in the <u2ee;s 0alue against the Dollar would mean that our goods would
7e more ex2ensi0e in Dollar terms, which ma+ reduce our sales a7road.
=lternati0el+, if the Dollar 2rice of our goods is 6e2t fixed "li6e consultanc+ fees of
our software engineers%, the corres2onding <u2ee realisation would 7e less.
>ither wa+, our ex2ort earnings ma+ suffer. This has alread+ affected the 7ottom
lines and share 2rices of some of our software com2anies. The same ma+
ha22en to other ex2ort industries, es2eciall+ in the US mar6et. ?n the im2ort
side, howe0er, the <u2ee cost of oil and other goods "whose 2rices ma+ 7e fixed
in dollars% would fall, which ma+ hel2 6ee2 the inflation rate down. India;s ex2orts
grew at the rate of 1$ 2er cent o0er the #!!#-!3 fiscal +ears, des2ite the rising
<u2ee against Dollar. Does this mean that the exchange rate is irrele0ant
ex2orts@ The answer is no. :irst, as alread+ stated, the <u2ee has 7een
de2reciating against other non-Dollar currencies. In real terms "which ta6es into
account the difference in inflation rates in India and the fi0e other countries% the
<u2ee de2reciated 7+ 3 2er cent. So, the international 2rice com2etiti0eness of
Indian goods in glo7al mar6ets was not affected ad0ersel+ 7+ the <u2ee;s
de2reciation against the Dollar. Second, the im2act of an+ change in exchange
rate on trade flows ta6es time to manifest since 2ast ex2ort-im2ort contracts
remain 0alid for some time. Peo2le need time to re0ise their contracts, e0en
when exchange rates are changing.