Depreciating Indian Rupee: What Does It Mean, Who Will Gain and Who Will Loose?

Posted on May 25, 2012

By Guha Rajan:

With Indian rupee depreciating, it paints a grim picture of our economy. The instability is attributed to many factors including the Euro crisis. Since 2006, economies around the world are in turmoil, if one country attempts to come out, it impacts directly or indirectly the other country. It started of with US mortgage crisis in 2006/07, which was followed by the infamous Lehman brothers crisis and other financial institution collapsing then in 2008. Then came the crash of stock markets, Euro crisis which was followed by appreciation of gold. The news coming out these days is quite conflicting, in one month we would see economic recovery being projected and the following month, one would see depressing news about the economy.

What does rupee depreciation mean to the Indian economy and who could be the probable Gainers or Losers?.

The Gainers:

  • Exporters, particularly who are using the resource and raw materials by paying them in INR and getting return in USD.
  • Companies earning in USD and reporting and exchanging to INR would stand to gain.
  • Indian Origin people sending foreign currency to India and converting them into INR and making permanent investment in India - The reason being they would be getting more INR for lesser amount of USD.

A 100 USD with exchange rate of 56.5 will fetch more INR compared to 100 USD with exchange rate of 40 INR.

The Losers:

Importers, more particularly India Government importing large volume of oil is bound to suffer. Normally such increase in Oil cost is passed on to the customer and naturally, people of India would have to burn more money (as is already evident from the increase in petrol rates). This would eventually continue the spiraling of inflation, which is already high.

Foreign equity investors who are looking for gains might lose, if they attempt to pull out their money.

In short term for India, it will be good if the money does not flow out of India, however, in long run if INR is volatile and continues to depreciate, foreign investors would lose interest in Indian markets.

Lets hope the INR bounces back.

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