EFFECT OF RUPEE APPRECIATION ON DIFFERENT SECTORS

SUBMITTED BY:
BENSON RICHARD KANDULNA-MBA/1080/06 MUZTAR HUSSAIN- MBA/1101/06 SHRIYA WALI-MBA/1070/06 VISHAL SAHU-MBA/10/06

RUPEE THE HISTORY OF REVALUATION AND DEVALUATION

The Fall Of Rupee :
All industrializing countries followed Germany in adopting a gold standard throughout the 1870s. India, subject to imperial policies didn't move to a gold standard. A huge divide between silver-based and gold-based economies resulted. With discovery of more and more silver reserves, those currencies based on gold continued to rise in value and those based on silver were declining due to demonetization of silver.

1991 Economic crisis :

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. At the end of 1999, the Indian Rupee was devalued considerably.

Revaluation :
In the period 2000-2007, the Rupee stopped declining and stabilized ranging between 1 USD = INR 44-48. However in the mid-2007, the rupee has started gaining strength and for the first time in more than a decade broke the 1 USD = INR 40 barrier. This has led to severe business challenges for Indian firms such as Infosys, TCS and Wipro that have benefited considerably from foreign outsourcing.

1966 Economic crisis :

Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sectors negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation.

DEVALUATION HISTORY: A VIEW

Year
1970 1975 1980 1985 1990 1995 Value of one Rupee (units per US$) 7.576 8.409 7.887 12.369 17.504 32.427

1996
1997 1998 1999 2000 2006 2007(Oct) 2008(Mar)

35.433
36.313 41.259 43.055 45.000 48.336 38.48 40.51

RUPEE DEPRECIATION:ITS CONSEQUENCES

ADVANTAGES
The precipitous fall in the value of the currencies of the Southeast Asian economies, Russia and Brazil amongst others have rendered the rupee overvalued in real terms & adversely affected the Indian economy and this is reflected in the large current account deficit and the dull economic conditions. A depreciation of the Indian rupee would lead to a shift in at least a part of this competitive advantage to the Indian export firms, thus boosting Indian exports. The rise in exports will give a boost to the recovery of economic growth. Similarly, a weaker domestic currency would make imports dearer. This will act as a barrier against imports, thus improving the trade balance Weaker domestic currency would help attract more foreign domestic investment

DRAWBACKS
A major drawback of depreciation in the value of the rupee is that it will increase the burden of servicing and repaying of foreign debt of the Indian Government (which has dollar denominated debt) and those companies that have raised dollar denominated debt. Another drawback of a weak currency is that it might dissuade foreign institutional investment (FII) from investing in the country. Another fallout of a weaker currency could be higher interest rates in the economy, with the help of which the central bank/Government might want to fight off the pressure of depreciation in the value of the domestic currency.

RUPEE APPRECIATION :MISSES !!

After depreciating by 6.2% between April 2nd 2004 to August 6th 2004, the Rupee has appreciated by as much as 5.7% since then one cannot ignore the fact that it has implications on the stock market and profitability for India Inc. The data is of FY04 from the Quantum Universe of 350 companies. All figures are as a percentage to sales, on a standalone basis. We have divided the export dependent sectors into three sets i.e. software, pharmaceuticals and companies from other sectors. Given the fact that software exports (including ITES) accounted for an estimated 17.9% of the country's exports in FY04, it is not surprising to see that the contribution of exports to revenues of technology companies are higher. domestic pharma majors are also highly dependent on exports viz. US, Europe, South America and SAARC countries. Of the consolidated revenues of Ranbaxy, 43% was accounted by the US markets in FY04. In the case of Dr. Reddy (REDY.BO, news) 's, the contribution stood at lower at 28% in FY04. While companies like Biocon, Nicholas Piramal and Wockhardt do not have significant US contribution as of now, going forward, this is likely to increase and to that extent, margins may be affected. Besides pharma majors. other sectors from the list that are highly dependent on exports are hotels (Hotel Leelaventure and EIH) and Nalco. On a conservative basis, dollar denominated revenues account for atleast 60% of room revenues of hotel companies. While the removal of the quota regime is a positive for the textile sector, if rupee continues to trade firm or appreciate, it may not be that profitable. In this context, expectations need to be realistic.

Software Satyam Computers Hughes Software Geometric Software Infosys i-flex Mastek (MAST.BO, news) Digital Patni Computers

Pharma 90.2 Wockhardt (WCKH.BO, news) 94.3 Cipla (CIPL.BO, news) 95.1 Lupin 95.2 Aurobindo 95.3 JB Chemicals 95.9 Dr. Reddys 36.6 Nalco

Other sectors 55.3

44.1 United Phosphorus 47.3 Satnam Overseas 51.0 Ashapura Minechem 51.8 EIH 58.9 Hotel Leelaventure 59.8 Sesa Goa 62.4 Welspun India (WLSP.BO, news)

57.3 57.6 58.6 58.6 66.5

98.2 Biocon 99.6 Ranbaxy

69.7 74.3

Mphasis BFL
VisualSoft (VISO.BO, news)

99.6 Orchid Chemicals

100.0 Divis

76.6 Himatsinka Seide

85.4 Suraj Diamonds

92.5

RUPEE APPRECIATION : HITS !!

The biggest beneficiaries from the Rupee appreciation are importers. Companies from energy dependent sectors are likely to benefit in a significant manner (energy, paints and few textile majors). Companies that source raw materials from the global markets and are largely domestic demand driven could potentially witness margin improvement. Rupee appreciation is also a positive for the government's financials and capital goods sector.
Energy & petrochemical HPCL Gulf Oil (GULF.BO, news) Southern Petrochem Flex Industries IOC Finolex (FINX.BO, news) Chennai Petro Kochi Refineries Reliance (RELI.BO, news) MRPL (MRPL.BO, news) Other sectors 18.1 Mercator Lines 18.9 Welspun Gujarat 22.1 Apar Industries 56.9 60.0 60.5

24.3 D-Link India 31.0 Sterlite Industries 36.0 Zuari Industries

60.7 Suraj Diamonds 62.4 Moser Baer 65.2 STC India 67.0 Godavari Fertilisers

63.8 66.7 68.6

75.1 76.1 78.9 86.3

EFFECT OF RUPEE APPRECIATION

TEXTILE MACHINERY INDUSTRY: The sector is witnessing a loss of 9.7 % due to rupee appreciation. The appreciating rupee to the extent of 14% in the last one year had a very bad effect on the textile sector, as overall margins for the industry are below 10%. As many sectors like textile machinery, accessories and chemicals and auxiliaries also depend on the textile sector, they too have been severely affected. The Information Technology (IT) and Business Process Outsourcing (BPO) companies in India felt the pinch as 70 percent of the payment by the clients was done in dollars resulting in losses for companies in this sector. IT & BPO were sunshine sectors in India, contributing some 5.2 percent to India's Gross Domestic Product (GDP), and it was estimated that between 20 and 25 percent of India's GDP expansion in the next three to four years would come from the IT industry in India. But the rise in rupee value was increasingly proving to be a disadvantage for this sector. The healthcare industry has come under a lot of price pressure especially from the US and Europe. Their expenditure has gone up and the performance has not been very good, both in the top and bottomline. It is only because of acquisitions that some of them are doing well. Whats pulling down the sector is the export valuations, said a healthcare analyst from a city-based broking firm. The Rs 30,000-crore leather industry, with 46% exports, achieved a positive export growth rate of 10.72% in rupee terms last year. It was aiming to achieve further growth this year. The continuous appreciation of rupee against dollar in the last seven to eight months has affected the industry. This has resulted in the decline of export of leather and leather products from Rs 8,020.75 crore in April-October, 2006 to Rs 7,786.86 crore in April-October, 2007, a negative growth of 2.92%. The hospitality sector is feeling the heat of the appreciating rupee. Senior officials of hotel majors, including Hotel Leelaventure Ltd, Indian Hotels Company Ltd and Royal Orchid Hotels Ltd (ROHL), confirmed that the rising rupee had impacted their topline growth by about 8-10 per cent during the first quarter of the current fiscal. The hotels, however, witnessed an overall growth on the back of a booming economy. AUTOMOBILE COMPONENTS INDUSTRY: A stronger rupee has shaved off 10% from the export revenues of many small component makers in this period.

A MIXED RESPONSE: STRENGTHENED RUPEE

Indian industry looked confused over the issue whether the RBI should intervene in order to protect exporters from the gaining rupee or not. As per CII, the domestic industry would have to accept a strengthening rupee in the short term, whereas, FICCI, Assocham and FIEO fancies RBI to check the sharp climb in the currency. IT sector and labor-intensive sectors such as textiles and leather, must be protected. The appreciation of the rupee is finally taking a toll on exports and an Assocham study today estimated their deceleration to 145 billion dollars against the targeted figure of 160 billion dollars for 2007-08. Any appreciation in the rupee results in an erosion in the value of the RBI's foreign exchange reserves in its balance sheet. In a bid to grant relief to the exporting group that has been making loud demands for assistance against the intense growth in the Indian currency versus the U.S. dollar, the Centre expanded the span of service tax refund to exporters and also extended the number of spheres entitled for inferior interest rates on pre-shipment and post-shipment credit. With infrastructure demanding large funds, especially foreign capital, it is of utmost importance that the country has an appreciating currency to instill confidence among overseas investors. Thus, an appreciating currency is the need of the hour and any lobby against this is counterproductive

SUGGESTIONS
The government can reduce export duty for exporters. The government can waive off the custom duty. The exporters should reduce there over-dependence on Dollar. FIIs: one can be very optimistic regarding the flows from foreign land to India because India is still an untapped market for many of the big investors and we account for only 1% of worlds inflow.

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