2. Effect of dollar fluctuation
on Indian trade
Sajal Agarwal
PGDM(2020-2022)
Jaipuria Institute Of Management, Indore
3. INTRODUCTION
Most of the world's currencies are bought and sold based on flexible
exchange rates, meaning their prices fluctuate based on the supply and
demand in the foreign exchange market. A high demand for a currency or a
shortage in its supply will cause an increase in price. Currency fluctuations
are a natural outcome of the floating exchange rate system that is the norm
for most major economies. The exchange rate of one currency versus the
other is influenced by numerous fundamental and technical factors. These
include relative supply and demand of the two currencies, economic
performance, outlook for inflation, interest rate differentials, capital flows,
technical support and resistance levels, and so on. As these factors are
generally in a state of perpetual flux, currency values fluctuate from one
moment to the next. But although a currency’s level is largely supposed to
be determined by the underlying economy, the tables are often turned, as
huge movements in a currency can dictate the overall economy’s fortunes –
a currency tail wagging the economic dog.
4. OBJECTIVE
1. To know the effect both positive and negative on various Indian
sectors due to change in dollar value.
2. To understand the concept of exchange rate and currency
fluctuation.
3. To understand the causes for decline of the rupee against dollar.
6. The impact on various Indian sectors due to change in dollar
are as follows• :
• Petroleum
• Data interpretation: as India depends 80% of its total petroleum consumption on
imports, as a result it is one of the biggest reason of trade deficit.
• Price of imported petrol and dollar value is directly proportional.
• In order to meet increasingly petroleum requirements we need more of foreign
currency as a result its demand increases and Indian rupee weakens against dollar.
• And this increase in petroleum prices affects many other sectors also such as
transportation, which in return increases many of the other sectors as all these are
linked to one another.
0
10
20
30
40
50
60
70
80
90
2000 2005 2015 2018
dollar
petrol
7. These are the sectors that will hurt due to a
weaker rupee:
SECTOR IMPORT EXPORT NET IMPORT
ELECTRONICS 45.56 6.97 38.59
MINERALS 21.56 3.2 18.36
ENGINEERING 74.22 63.64 10.58
CHEMICALS 34.17 33.58 0.59
8. THESE SECTORS WILL BENEFIT FROM A
WEAKER RUPEE:
SECTORS IMPORT EXPORT NET EXPORT
AGRICULTURE 25.58 33.41 7.83
LEATHER 0.99 5.33 4.33
TRANSPORT EQUIP. 17.58 21.6 4.02
9. Textile
• Data interpretation: as it is with other export industries, textile industries also get
short term benefits because of the weakening of the rupee.
• As textile industry contributes at a large scale in aggregate of Indian exports, and
when the dollar value goes up it benefits the textile exporters by increasing their
revenues because our products becomes cheaper in international market.
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2014-15 15-16 16-17 17-18
exports
exports
10. WHEN RUPEE RISES
• Data interpretation: in nifty 47% of its industries are exporting industries and the
strengthening of Indian rupee value against dollar causes a decline in the earning
of these exporting industries. According to the above report if the Indian rupee
moves from 67 to 62 dollar , the energy dept will a face a setback of 7% in its
earning per share, IT dept will face a setback of 9% , export auto -12%, pharma-
9%, engineering -4%, metals -15%, which contributes a total of 4% setback in
nifty.
-40
-20
0
20
40
60
80
100
120
percemt weight in nifty
percent change in EPS if INR moves from 67-
62
11.
12. Concept of exchange rate and currency
fluctuation
An exchange rate is the value of one nation’s currency versus the currency of another
nation.
Who fixes the value of Indian Rupee against US dollar?
Interesting question. Do you think the Indian government fixes the value of Indian Rupee
against US dollar?
If not, who fixes it? RBI? NO
At present, none of these entities fixes the value of Indian Rupee. Now the value of
Indian Rupee (or any other currency) is determined by the market.
Yes, Market!
Here market means the currency market.
• The demand and supply forces in the currency market determine the price of each
currency.
• If the demand for Indian currency is high, Indian rupee will appreciate (for example 1$
= Rs.40), and if demand is low, it will depreciate (for example, 1$ = Rs.70).
13. Fixed Rate System vs Floating Rate System
If the government or RBI fix the exchange rate of a currency (and does not allow any
variations according to demand and supply forces in the market), such a system is
called the Fixed Rate system. It is also called the Breton Woods system or Pegged
Currency System.
India was following this kind of system till 1975 and partial controls followed until 1993.
Since this currency valuation mechanism is artificial, most of the countries including
India changed to Floating Rate System where currency market determines the value of a
currency.
Rupee Devaluation vs Rupee Depreciation
The term devaluation is used when the government reduces the value of a currency
under Fixed-Rate System. When the value of the currency falls under the Floating Rate
System, it is called depreciation.
Revaluation is a term which is used when there is a rise in currency value in relation with
a foreign currency in a fixed exchange rate. In the floating exchange rate regime,
the correct term would be appreciation.
14. Causes for decline of rupee against dollar:
Strong demand of US dollar
One of the important factors driving down the domestic currency has been strong
demand of the US currency from importers and banks and weak condition of regional
Asian currencies against greenback
Rising crude oil import bill
Weakening rupee makes our import costlier. Since India depends on imports for large
part of crude oil, a weak rupee shoots up the fuel prices.
Differentials in Inflation
Typically, a country with a consistently lower inflation rate exhibits a rising currency
value, as its purchasing power increases relative to other currencies. During the last
half of the 20th century, the countries with low inflation included Japan, Germany, and
Switzerland, while the U.S. and Canada achieved low inflation only later. Those
countries with higher inflation typically see depreciation in their currency about the
currencies of their trading partners. This is also usually accompanied by higher interest
rates.
15. Differentials in Interest Rates
Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest
rates, central banks exert influence over both inflation and exchange rates, and changing interest rates
impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return
relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange
rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much
higher than in others, or if additional factors serve to drive the currency down. The opposite relationship
exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates.
Current Account Deficits
The current account is the balance of trade between a country and its trading partners, reflecting all
payments between countries for goods, services, interest, and dividends. A deficit in the current account
shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital
from foreign sources to make up the deficit. In other words, the country requires more foreign currency
than it receives through sales of exports, and it supplies more of its own currency than foreigners
demand for its products. The excess demand for foreign currency lowers the country's exchange rate
until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive
to generate sales for domestic interests.
16. Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While
such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign
investors. The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately
paid off with cheaper real dollars in the future.
Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of
payments If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have
favorably improved. Increasing terms of trade shows greater demand for the country's exports. This, in turn, results in
rising revenues from exports, which provides increased demand for the country's currency (and an increase in the
currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's value will
decrease in relation to its trading partners.
Political Stability and Economic Performance
Foreign investors inevitably seek out stable countries with strong economic performance in which to invest
their capital. A country with such positive attributes will draw investment funds away from other countries
perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable countries.
17. CONCLUSION
• The Indian export industries will benefit from a weaker rupee: when dollar
value goes up.
• Whereas, the Indian import industries will face a setback from a weaker
rupee: when dollar value goes up.
• The effect of petroleum price affect all other industries.
• At present what should worry the Finance Minister and RBI governor should
not the falling Indian Rupee, but the fluctuations in the currency market. What
India needs is stabilization of Indian Rupee value, be in Rs. 50, Rs.60 or Rs.70
per 1 US dollar. But if rupee is Rs.60 one day and if it Rs. 65 the next day, it
shows high volatility. Such a situation is not good for the economy and that will
only trigger more fall in Indian rupee.
• In present time internal factors are highly affected by external factors.
• All the people should be very cautious whoever are going to foreign countries ,
be it for educational purposes or for travelling or any other reason because any
increase in the value of the dollar can make the expenses increase significantly.
18. • The fall in the value of currency affects a lot of economic growth indicators.
Depreciation of rupee reduces the inflow of foreign capital, rise in the external
debt pressure, and also grow India’s oil and fertilizer subsidy bills. The most
positive impact of depreciation of rupee is the stimulation of exports and
discouraging imports and thus improving the current account deficit. But, even
after significant increase in the exports and sales in this year, Indian companies
are reporting huge foreign exchange losses due to the depreciation of Indian
rupee. This declines the overall profitability of these companies. As far as imports
are concerned, for a country such as India, imports are necessary. Grim global
economic outlook along with high inflation, widening current account deficit and
FII outflows have contributed to this fall. RBI has responded with timely
interventions by selling dollars intermittently. But in times of global uncertainty,
investors prefer USD as a safe haven.
