Introduction
To better understand the fluctuating dollar value against the rupee, let us get to know some basics: The IT sector and BPO companies have seen only good times, except in early 2000. This trend of the rising rupee will force them to be more innovative in managing their treasury, operational efficiency and their geographic footprint. For last several years, many Indian companies were satisfied with their on-site /offshore model. Now it has become important to speed up plans to not only spread the geo-political risk but to manage the strategic risk. Indian IT/ITES companies have also started diversifying globally in order to reduce their exposure to the US market. For instance, the big five Indian IT companies, derive about 70% of their revenues from the US, have now started focusing on Europe in a big way . Infosys, WIPRO and TCS get about 28%-30 % revenue from Europe.
The Indian rupee is on a rising curve. In the past one month it has appreciated by 3.6% to the dollar and since January 1, 2008 by a whopping 12% to the dollar. The rising rupee has become a major cause for concern among Indian ITES/BPOs firms, especially the smaller firms that are not adequately hedged. Minimum alternative tax (MAT) and service tax further add to their blues. With every 1% appreciation in the rupee the operational margins decline by almost to the tune of four basis points. The BPO companies are primarily offshore driven. More than 95% people are from here, so that means their cost is in Indian rupees and many of them earn in dollars. So, they will have a larger impact than the IT companies with a large part of onsite component where people work in the US so their salaries are also paid in the US. So to that extent, there is less impact. Almost all Indian companies have started hedging their currency positions. Some companies park a part of their dollar deposits abroad, so as to avoid the risk of currency movements.
Companies are trying to bring in efficiency in various ways to mitigate the impact. The improvement in billing rates can offset some of the currency impact. More importantly, new clients are coming in at higher price points. This may be difficult as the local companies are not affected by this trend and compete very well with the global delivery capabilities of the Indian companies. The rupee has, in a year to date, appreciated by 12.8% to the US dollar. This has benefited the Indian economy by making imports cheaper, especially crude oil. On the other hand, however, this appreciation is likely to cause significant harm not only to Indian exporters but also to the Indian economy in the long run, especially because most of this appreciation is occurring not due to a trade surplus but due to large inflows of foreign exchange that can reverse themselves quickly, thereby, depreciating the rupee and causing massive inflation.
The relatively ‘free-floating’ nature of the rupee is responsible for such enormous inflows of foreign exchange through FIIs, FDI, and short term as well as long-term deposits sent by PIOs. Rupee appreciation is already impacting the profit margins and pricing for many Indian exporters because the cost of labour and some goods is in rupees whereas more than 80% of sales contracts signed by Indian exporters are in dollars. The Chinese Yuan, Pakistani rupee, South Korean won, and Bangladeshi taka have only appreciated by 1% to 5% during the last year, thereby, making the products and services exported from these countries more competitive.
Since nearly two-thirds of India’s exports come from Indian SMEs who have thin margins anyway, because of the increased competition, clearly some of these SMEs will go bankrupt. In fact, since traditional exports (in textiles, chemicals, gems and jewellery) are labour intensive, around 3.5 million people have already lost jobs during the last few months another 4.5 million may lose during the next few. Furthermore, since the IT and ITES industry derives more than two-thirds of its revenue in US dollars, most Indian companies in this sector would have their net profits before taxes reduced by 6% by the end of March 2008. Exports during the months of July and August ’07 posted a growth of 18% as compared to 41% a year ago. Similarly, the growth rate during April-June 2007 also stood at 18% in contrast to 32% during the same period last year. That number is a sharp drop from last year’s growth of 25% and significantly short of the Indian government’s target of 28% export growth to achieve $160 billion during the fiscal year 2008.
Exchange rate mechanism
Exchange rate – the rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another. Foreign exchange market – Also known as “Forex” or “FX”. It is a market to trade currencies. Indian foreign exchange rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar
Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the world’s largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48, was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike .But in November 2008 value of rupee 50.1=$1
Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation.Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like – Foreign investment of up to 51% equity limit in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special circumstances; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate.
Appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. Profit margin is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. It is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage. Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control. Profit margin may be either gross profit margin or net profit margin.
The Gross profit margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled. The net profit margin tells you how much profit a company makes for every $1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Several financial books, sites, and resources tell an investor to take the after-tax net profit divided by sales.
The exchange rate of the currency of a country in relation to the currency of another country depends on the comparative trade advantages and economic strengths of the countries. As the trade advantage and economy of each country improves or deteriorates, the exchange rate of their currencies fluctuates accordingly. The Indian economy, which does not quite match the US economy, has seen the rupee decline against the dollar over decades. If one compares the rupee and the dollar rates from the '90s up to a couple of years back, one would find that the rupee has consistently fallen by about eight per cent every year. This means that though the US economy was growing faster than the Indian economy, it does not necessarily imply that it was growing fast enough for the rupee to fall by about eight per cent every year. The fall of the rupee in a year could have been more than eight per cent or less if free market forces had been allowed to come into play.
The Reserve Bank of India (RBI), as the central bank of India, which oversees the foreign exchange (forex) management of this country quite often intervenes to ensure that the rupee is adequately propped at a particular rate. This is done to ensure that there are no sudden currency shocks, to protect exporters and importers and above all, to ensure the feeling of 'national pride,' which is attached to a stable and healthy currency. Now RBI intervenes to prop up the rupee by witnessing a surge of dollar-inflows into India. This huge influx causes a significant demand supply gap between the dollar and the rupee and in keeping with the laws of demand and supply, the rate of the rupee, which becomes short in supply.
The RBI having set its priority of ensuring more dollar inflows into the country will start buying dollars from the Indian market. This will brings down the demand supply gap and will, ultimately, hold the dollar at a rate exporters are comfortable with. There is however, a catch here. When the RBI buys dollars from the Indian market, it simultaneously pumps rupees into the currency markets, creating the risk of inflationary pressures, a phenomenon no one, least of all the RBI and the Government of India want. To contain inflationary pressures, the RBI adopts a measure termed as 'sterile intervention.' Under this measure, the RBI sells Government of India bonds in the market. With the sale of these bonds, the rupee, which had flowed into the market for buying dollars, is once again sucked out of the market. This is how the RBI protects the dollar-rupee exchange rates and, yet, manages to contain inflation.
Recently RBI policy seems to have changed. The rupee has been allowed to rise and is currently at a nine-year high against the dollar. One important trigger for the reversal of policy has been the concern about the rising inflation rate. An appreciation of the rupee would make imported foreign goods, such as crude oil and petroleum products cheaper in India. But, conversely, the rise in the rupee would make Indian goods costlier abroad and cut into exports. In other words if the dollar price of exports is kept fixed, the corresponding rupee realization would be less. Either way, exports would become less profitable, relative to home sales. This, it was hoped, would divert some export products to the domestic market. Consequently, the availability of goods would increase at home, pushing down prices, helping the Government tame inflation.
Indian tourists will find their foreign trips a little less expensive while the opposite would be the case for foreign travelers in India. As a result, the Indian tourism industry, would have a negative impact. Because of higher interest rates at home, many Indian companies have been borrowing heavily from the international markets at lower rates, especially for financing their recent acquisition drives. The resulting foreign exchange inflows are an additional factor pushing up the value of the rupee. If the Indian borrowers feel that the rupee is going to appreciate even more, they would surmise that the debt servicing cost in rupees would go down. This would make External Commercial Borrowings (ECB) more attractive, even at unchanged interest rate differential. On the other hand, if they believe that the rupee is overvalued and can fall , then the balance would tip the other way.
If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has to discourage ECB. Given the higher and rising interest rates in India, it is difficult to do so, unless the RBI puts more restrictions on ECB. But the RBI is unlikely to do this. For one, the Government wants to develop Mumbai as an international center for financial services. To achieve that goal, the central bank will have to gradually remove restrictions on international capital flows and move towards full capital account convertibility. In fact, the last Credit Policy further increased the limit for Indians investing abroad. The RBI is hoping that the additional inflows will be offset by more outflows as a result of the raised ceiling on foreign investments by Indians. However, this is unlikely to happen given the huge interest rate differential in favor of India. To the extent companies are using ECBs to finance capacity expansion, this would also help both growth and inflation control in the long run.
According to the RBI, there is excess liquidity in the system. This is mainly because of strong inflows of foreign funds into India. With huge inflows of dollars, the rupee has been getting stronger against the dollar. Foreign investors have helped Indian stocks go up. The US Federal Reserve rate cut is a major boost for the Indian stock market. The foreign fund inflows may increase. A stronger rupee eventually means Indian goods and services will be less competitive in the main export markets. India’s exports to the US are mostly labour-intensive and especially so in respect of business process outsourcing. The impact of the rupee appreciation can hit the thin profit margins of BPOs. Exporters who are uncovered are losing because of the rupee appreciation. Exporters need to keep their receivables hedged. With the increase in foreign funds, the dollar would further depreciate against the rupee. The rupee appreciation affects the export oriented companies and companies having mainly overseas revenues. These include IT companies, technology stocks and so on. Although their revenues are increasing, the net realization and profit margins are being adversely impacted because of dollar depreciation. With margins being eroded, the stock prices of these companies are also adversely affected. IT industry is particularly impacted because most of their clients and billings are US dollar denominated. At the same time the import intensive industries benefit by the rupee appreciation. They now need to pay lesser dollars than before to import their equipment and raw materials. This in turn improves their bottom lines. This applies to industries like capital goods industries. As a result, the stocks of such companies see an upswing. Global commodity companies price their products on landed costs. With a decrease in landed costs, profits for these companies will be hit Software companies are also going to lose on the back of the appreciating rupee as their exports are priced in US dollars. On the other hand, sectors that are likely to gain from the currency gaining are auto, engineering and aviation, as the price of their imported raw materials will cost less. Engineering companies gain on raw material cost savings. Companies with foreign currency loans are also likely to gain due to rupee appreciation.
India's former finance minister P. Chidambaram and Y.V. Reddy, the governor of the Reserve Bank of India (RBI), India's central bank, face Canute's predicament. In the public mind, they seem to be trying to reverse an inexorable inflow of dollars and its consequence - an appreciating currency. Once traded at 47 or 48, the rupee now hovers at 40 to the dollar. Observers call it the fastest appreciation of the Indian currency in three decades. Is the rising rupee good or bad for India? What impact will it have on the global competitiveness of Indian firms? Should the RBI or the Finance ministry intervene? Responding to these questions and more, experts at Wharton and elsewhere say that the rupee's rise is the result of India's growing ability to attract global capital. While this creates problems for some companies that earn most of their revenues in dollars - including IT giants such as Wipro, Infosys and TCS - it also creates opportunities for Indian firms by making it less expensive for them to acquire overseas assets.
The foreign direct investment (FDI) numbers are equally impressive. In 2006-07, FDI inflows touched $19.53 billion, a 153% increase over the previous year. The government is looking at a target of $30 billion in 2007-08. Foreign exchange reserves stood at $214.84 billion on July 6. This is a far cry from $5.8 billion in the dire days of March 1991, when India had to pledge its gold to stave off a default crisis.Indian exports enjoyed the advantage of slow depreciation of currency during the period of mid-2005 to mid-2006. Rupee showed a turn around since August 2006. In terms of Real Effective Exchange Rate (REER), it rose steadily between August to November 2006 and slipped slightly thereafter. From March 2007 onwards, Rupee experienced a rise in its value and rupee has appreciated by almost 8% during March to May 2007. Appreciation was much higher against US Dollar compared to Euro. Another round of appreciation is visible between August-October 2007, which has been relatively mild. REER provides the trade weighted average change in exchange rate vis-à-vis major currencies. Hence, the appreciation rate as reflected in REER provides a combined picture of how Indian Rupee got appreciated in recent times.
Rupee got depreciated during July to October 2005 and then February to August 2006. In Rupee terms, monthly exports grew by 51% and in US Dollar terms monthly exports growth rate was 41% during this period July to October 2005. In the entire period of 2005-06, exports grew by 23.44% in US Dollar terms and touched US $ 103 billion. In terms of Rupee, growth was around 21.6% and total exports in 2005-06 were Rs.4.6 trillion. During the period 2006-07, India’s exports grew almost by 22.5% in US Dollar terms and total exports reached to US$ 126 billion. In Rupee terms, growth was 25.3% and total exports were Rs.5.7 trillion. Impact of changing values of currency on exports has not been significant during 2005-06 and 2006-07 as both the periods were marked by appreciation as well as depreciation of currency which played an overall neutralizing role. Moreover, impact of appreciation of Rupee on exports requires at least four to six months time to get realized.
Since April 2007, as there has been sharp rise in the value of Rupee, there is a severe impact on the export growth rate .The cumulative exports during the period April-October in 2005 was US $ 57 billion (Rs. 2.5 trillion) which increased to US $ 71 billion and (Rs.3.2 trillion) in April-October of 2006 registering a growth rate of almost 24.4% in US Dollar terms (30% in Rupee terms). The cumulative exports during April-October of 2007 have been US $ 85.5 billion (Rs.3.5 trillion). In US Dollar term the growth was around 21% but in Rupee terms the growth declined to only 7% implying a serious blow in terms of rupee realization of Indian exports. In case of imports, cumulative value of imports for the period April-October, 2007 was US $ 130 billion (Rs. 5.3 trillion) as against US$ 103.7 billion (Rs. 4.8 trillion) registering a growth of 25.31% in Dollar terms and 11.07% in Rupee terms during the same period of 2006. The import growth rate for the same period in 2006 over 2005 was 26% in US Dollar terms and 32% in Rupee terms. Slowing down of import growth in 2007 has been mainly because of less growth in POL import. This has proved that India’s import has not increased significantly despite the fact that Indian rupee has appreciated significantly in recent months. In fact, slowing down of import growth rate implies that India’s import is less elastic with respect to exchange rate.
In 2006-07, India witnessed large trade deficits to the tune of US $ 65 billion and current account deficit was as high as US $ 10 billion. The level of trade deficit should have been enough to depreciate the rupee, as supposed in traditional exchange rate theories. However, interest rate cuts by the US Federal Reserve led to higher inflow of portfolio investments into the country resulting in unprecedented and continuous rupee appreciation. Foreign portfolio investment recorded an inflow of US $ 20.7 billion during April-July 2007. FDI inflow was also significantly high and recorded US $ 6.6 billion during April-July 2007 (US $ 3.7 billion in April-July 2006). Large inflow reflects expansion of domestic activities, positive investment climate, and positive view towards India as a long-term investment destination.
Effect of dollar Rupee exchange rate in different sectors
Rupee appreciation affects different sectors, differently. High-import intensity sectors like automobiles, petroleum products, gems and jeweler, fare better in face of a stronger rupee as appreciation renders their imported inputs to a lower value. However, the appreciating rupee could significantly erode net profit margin of low-import intensity sectors like textiles and leather, as exporters of these sectors remain in a disadvantageous position especially in price sensitive international markets. Many of the low-import intensity sectors also operate with very low margins, making them feel the heat of rupee appreciation more. The impact on employment is also directly related to the factor intensity of production both in the export units as well as in the input sector. If the input sector is labour intensive and export units use largely imported inputs, employment in input sector will get the hit as they will be replaced by cheap foreign inputs. This implies that even though high import-intensity sectors benefit from the appreciating rupee it does not necessarily mean that in the longer run the economy, as a whole, will be benefited.
The software exports sector also gets affected by the long-march of rupee. Indian IT companies derive a large share of their revenues from the US and a strengthening rupee erodes their margins. Software industry body NASSCOM contends that there has been ‘too much rupee appreciation in too short a time’, making small and medium IT companies to be the hardest hit. Industry sources state that a one per cent rise in the rupee value would affect bottom-line of the IT and BPO sectors by 30 to 40 basis points. While the full impact of the negative growth on employment will be assessed by the end of the financial year, the reports from industry and trade associations and exporters indicate that if this trend continues, by March 2008, the total job losses may exceed 2 million. A limited survey conducted by the Regional Authorities under DGFT covering 83 units including leather, textiles, engineering, plastics, marine products, pharmaceuticals, chemicals, agriculture and food processing, electronics and handicrafts and carpets has shown a job loss of 20,769 between April-November 2007.
Textile is an important sector in India’s export basket. This sector has negligible use of imported inputs and is employer of large number of people in India. Rupee appreciation has indicated loss in export growth both in textile as well as in readymade garment (RMG) sector. A comparison between April-June in 2006 and 2007 reveals that textile sector exports dropped by 0.66% in terms US Dollar (by 10.13% in rupee terms). The decline in RMG exports has been more severe. The exports fell by 4.21% in US Dollar terms and by 13.19% in Rupee terms.
Leather exports have fallen mainly at the beginning of the year, which may be due to early appreciation during the October to January period. During April-September, exports have increased. However, in rupee terms export grew only by 4.84% implying erosion at the time of realization of exports in Rupee. Over 65% of leather exports are invoiced in US Dollar. The problem is compounded as most of the Indian exporters cater to the lower end of the global market where penetration is directly depended on the price lines offered by the exportersLeather exports are significantly dependant on orders from the foreign buyers. Accordingly most of the employment offered by the sector is either unorganized or in form of contract employment. Due to the current Rupee appreciation, exporters are unable to negotiate prices with big buyers which resulted into smaller orders and this in-turn has caused loss of employment to the people working on contract basis or in unorganized sector. More than 94% of the manufacturing units serving the export markets are either small or medium sized ones. These units operate on thin margins and depend heavily on own funds for working capital as access to institutional finance is cumbersome or need collaterals. When the export realization has reduced, it not only wiped out the margins but also reduced the working capital. This led most of the exporters in to a vicious cycle of debt-low productivity.
Handicrafts are highly labour intensive products but pricing of handicrafts are difficult to explain by market forces completely. The intrinsic values of handicrafts are such that price depends on many non-market issues. The export market of handicrafts products is a reflection of this. It dropped significantly in July 2006 and rose again in September and fell thereafter. The cumulative exports during April-June 2006 were around US $ 110 million (Rs.5017 million) and it dropped to mere US $ 64 million (Rs.2610 million) during April-June 2007 reflecting a major erosion of export income both in terms of Indian Rupee and US Dollar. It is also important to mention that due to the time gap between contract, delivery and payment, exporters are bound to have been affected as Rupee appreciated so sharply within such a short time. As large numbers of rural and poor artisans are dependant on handicrafts products and most of the time they do not have fixed wages and they sell their products at piece-rate, any short fall in the export market affects them severely. Other sectors such as engineering goods, forest products, sports goods, chemical products agro products such as tea, rubber, coffee, etc. are also affected by rupee appreciation but the degree of injury is varying.
Dr. C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister has been requested by the Prime Minister’s Office to look into and offer suggestions on the measures sought by the Department of Commerce for mitigating the adverse effect on the exports arising out of the appreciation of the rupee.As India’s exports are getting affected, government of India has also taken several steps to neutralize the effect of rupee appreciation. Government announced a package in July 2007 which is mainly in the form of providing several incentives to exporters and enhancing some of the existing ones. The package includes enhancing of DEPB rates, duty drawback rates, decrease of ECGC premium, pre and post shipment credit interest rate, etc. To clear all arrears of terminal excise duties and CST reimbursement, an amount of around Rs.6000 million has been released by the Ministry. The government has also announced the exemption of Service Tax paid on post production export of goods. The exemption is allowed on some taxable services, which are not in the nature of “input services” but could be linked to export goods. However, some exporters are of the opinion that this incentive may be extended to service tax paid by exporters to foreign agents, movement of goods from factory to port/ICDs, on bank charges etc.
Apart from this, RBI has also announced to provide interest subvention of 2 percentage points per annum to all scheduled commercial banks in respect of rupee export credit to the specified categories of exporters mainly which have labour intensive production technique and less import intensity in terms of input use. Several organizations have also provided suggestion to government and currently they are being studied. Some of the suggestions are as follows:
● Funds in EEFC account may have the interest rates at par FCNR
● Separate refund mechanism for state level taxes
● Introduction of EXIM Scrip’s
● Separate export working capital fund which will be available to Bank at a cheaper rate etc.
RBI also has taken up several monetary policy measures which have some impact on the system especially on the value of Rupee. On July 31 2007, RBI raised the cash reserve ratio by 50 basis points, to 7% in order to drain liquidity from the system and thereby to handle inflation. At the same time it lowered the amount of money raised from external commercial borrowing that can be converted into rupees. It is expected that this will reduce the capital inflow and dampen the pace of Rupee appreciation. Central Banks of other countries where domestic currencies have been appreciating also take similar steps. The whole range of instruments include direct sterilization through issuance of government or central bank bonds, increases in reserve requirements, and different means of capital account management to manage the monetary impact of excess forex flows.
Firms are also required to handle their foreign exchange with due care. As India is gradually getting integrated with the world economy, currency volatility will become a normal affair. It is important to mention that firms are enjoying several incentives for quite sometime but there is a big question about converting these incentives into productivity gain. Loss due to currency appreciation may partly be neutralized with lower cost of production emerging from higher productivity. Within industry also, the effect of rupee appreciation varies among firms. More productive firms can absorb the loss in a better way. Also, due to volatile currency market, firms need to learn sophisticated methods of risk management.
Short term strategies of firms will be to use forex derivatives like forward contracts, options swaps and futures. Use of derivatives ensures the profit margins for cash inflows or outflows of foreign currency business transactions. Forwards are very useful for exporters especially in case of US Dollar has premium for forward values and is depreciating against Rupee. Exporters may use forward contract to switch the invoice currency into strong currencies by paying nominal charges without bothering the foreign buyer to change the invoice currency. Medium Term strategies mostly cover operational efficiency to hedge currency risk. Such approach covers internal matching of exposures by netting currency assets and liabilities, currency risk sharing clause in sale & contract, structured financial deal to reduce cost of borrowing etc. Analysis of cost portfolio is also essential. In the medium term, firms must start looking into the issues related to value addition of products and not just the cost arbitrage. Exporter while considering a market entry develops promotional strategy taking into account the anticipated exchange rate changes. Appreciation of rupee will adversely effect allocation of funds for such activities as compared to their competitors in international markets. Cost reduction will help to maintain promotional budget for business development.
Long term strategy of firm must focus on protection of foreign market shares, updating the product to reduce price sensitivity, making attempts for brand development and broaden the markets. Companies have to respond to exchange risk by altering their product strategy covering product innovation and new product introduction based on R&D. Constant improvement in product by following creative destruction of old product is required for survival during the time of strong rupee scenario. Quality of the product and service must be of world-class to win trust of overseas buyers. Companies also need to allocate sufficient funds to train employees about nuances of international business environment including risk management.
Conclusion
This paper examines the impact of dollar rupee exchange rate in Indian economic sector. Liberalized norms on foreign investment policy made forgin investment in India very attractive. Appreciation of rupee will affect exporters and BPO’s and depreciation will affect importers. More over exchange rate of the country in relation to comparative trade advantages and economic strength of the countries .Rupee appreciation renders the imputed inputs to a lower value and low import intensity sectors remains in a disadvantages position especially in price sensitive international market.
