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Falling Rupee: how to diminish the downside?

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Rupee is falling against the dollar for almost one year now (with only few months long rebound in mid 2011). This prolonged depreciation is caused as much by issues with domestic economy as it’s affected by the global financial turmoil.

Leaving macroeconomics aside, the question is what could India’s business people possibly do in the current situation in order to diminish the downside.

The complexity of the issue implies that there is probably no one "silver bullet" solution. But increasing trade with Europe could be one of the answers at least for those who are exporting. Suggestion might appear a bit counter intuitive having in mind all the negative news related to the euro zone. But the fundamentals are in favor of it.

First Euro fall against Dollar is less than Rupee vs. Dollar (1 year EUR/USD: – 14%, INR/USD:  – 19%). It implies the opportunity for hedging. Being paid in Euros is advantageous even if not used as a hedge against fluctuations INR/USD. During last year Rupee fell against the Euro only around 5 %. Milder shift converts into a more beneficial and balanced trade for exporters.

Now and again, I receive skeptical comments referring to a fragile state of the EU’s economy and stagnant growth rates. This argument is typically founded on a flawed assumption that EU is homogenous. But (for better or worse) it is not. The economic situation differs greatly throughout the union. Consequentially, even while most of the things in the news are correct, and the European Union has tremendous challenges to deal with, there are countries within it that are doing pretty well at the same time.

See the map depicting latest GDP growth rates (dark green equals highest growth up to +8%, light yellow – lowest). We can notice that almost all of the fast growing economies are clustered in the eastern part of the European Union.

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GDP growth, 2011 (Eurostat)

We can also observe, that the majority of them happen to be outside the Euro zone (except Estonia). They have national currencies that are either pegged to the Euro or free-floating. In all cases the Euro is commonly used for international payments.

It is difficult to make one encompassing conclusion. But some things are quite evident. It’s not a coincidence that those particular European countries are doing rather well. They have achieved a certain cost/value balance that enables to be globally competitive and attractive to investors.

Rahm Emanuel, a former chief of staff of Obama’s cabinet, famously said: "You never want a serious crisis to go to waste". Challenging developments that are taking place in Europe and, to a certain degree in India, encourage to search for new opportunities and innovate for growth.


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[Author: Mantas Balcius is an entrepreneur and business development consultant in Lithuania, Turkey and India. He’s a creator of www.indialithuniabusiness.com. Twitter @mantasbalcius]

  1. Mantas says

    Thank you for a thoughtful comment.

    I fully share your views – falling rupee could be advantageous and increase competitiveness. The problem however is India’s trade balance and the structure of imports. Due to the fact that India is so heavily depended on energy resource imports (mostly denominated in USD) the drop in Rs actually spreads and affects the whole economy. Also, a lot of raw materials are imported that are used to produce exportable goods.

    Weak rupee would be advantageous if it would help to increase the exports and reach positive trade balance. This however is not happening, we see trade deficits quite stable (1 year) and reaching around 14 bln USD a month. While exports have peaked April, 2011 and have been below that eve since. With this rough data in hand we we could conclude that falling rupee doesn’t stimulate exports.

    P.S. The currency data I have used for the article you may find here:
    http://finance.yahoo.com/echarts?s=INREUR=X#symbol=;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

    http://finance.yahoo.com/echarts?s=INRUSD=X#symbol=;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

    http://finance.yahoo.com/echarts?s=EURUSD=X#symbol=;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

  2. Altaf Rahman says

    Nice article.
    If you add up the depreciation of India / US / Euro, the figures are correct.
    Rupee fell 5% against Euro, Euro fell 14% against dollar and therefore Rupee fell 19% against dollar.
    Hedging is a very complex tool for Indians. Inspite of using these tools for years, most of Indian companies are losing money as per their anual results. In profit / loss, every company shows forign currency trades.
    Instead what they can do is use common sence just like in stock trading. All exporters are allowed to keep the receipts for a certain time before converting to rupees. (Recently RBI has reduced this time. Still they have some time). They can keep their receivables in forign currencies for as long as is permitted.
    Also instead of aiming to maximize profits with falling rupees, they can share the benifit with buyers to gain confidence and also increase business.
    For example, when they say, Indian currency is the worst performing in Asia, it means rupee has fallen the most. That means in businesses where the competition is intense and the margins are thin, the Indian exporters can bid competitively to gain business at the expense of other nations. This helps both the exporter (reduced overheads on more volume) and the Indian economy (more incoming forign currency).
    Just my two paisa :)

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