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Currency markets – is the Indian rupee really appreciating?

with 2 comments

https://ecofin.wordpress.com/2007/07/19/foreign-exchange-exposure-of-indian-it-bigwigsforward-exchange-contracts/ 

There is a lot of talk in recent days about the Indian rupee appreciating vis-a-vis the US Dollar and that the exporters are losing out on exports etc.

Let us take a holistic view of this in terms of hard facts and numbers rather than go by hearsay. The facts first:

1. The Indian rupee has risen sharply in recent months to just under Rs. 41 to a USD from Rs. 49 in 2002 – an appreciation of nearly 16%.

Critics argue that this is impacting the export market. First of all, it has to be remembered that in the currency market, there is something called a real effective exchange rate or REER and a nominal effective exchange rate. There is more: Swaminathan S Anlesaria Aiyar says the 6-currency basket REER has appreciated in the last 5-years from 97.43 to 108.20 but despite that Indian exports have tripled. However, what is interesting to note from his analysis is that the 6-currency basket consists of currencies of countries with who India does not directly compete in exports – the only exception being China. He uses facts to prove that we have almost 77% of India’s foreign trade and 89% of our exports in 2004-2005 that were directed towards the countries that are present in the 36-currency basket as opposed to the 6-currency basket that account for a little more than 40% of India’s foreign trade in 2004-2005.

He goes on to explain that the exports were not hit because of primarily two reasons:

1. Increased productivity

2. The 36-currency basket REER depreciated in export weighted terms from data gathered from the RBI bulletins (http://www.rbi.org.in/home.aspx) in the last 5 years.

He further explains (with facts) that the USD has weakened against all manner of currencies (and much more against the important Asian curencies) and not just the INR.

There are critics who would argue that even PPP (purchasing power parity) comes into play in the same equation. http://en.wikipedia.org/wiki/Purchasing_power_parity

PPP is what a unit of currency can fetch in terms of say, a basket of goods. ex: 15 INR can fetch a basket of goods, how much USD is required to buy the same basket of goods?

http://www.thehindubusinessline.com/2004/04/28/stories/2004042800201000.htm

The conclusion I would draw is from Swaminomics – http://swaminomics.org/– since he uses facts to prove his theory and that is what caught my eye.

For more information, please read his analysis at: http://economictimes.indiatimes.com/Opinion/Columnists/Swaminathan_S_Anklesaria_Aiyar/Dont_worry_rupee_isnt_really_rising/articleshow/msid-2019970,curpg-1.cms

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Written by Naveen Athresh

May 10, 2007 at 3:01 pm

2 Responses

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  1. […] Foreign exchange exposure of Indian IT bigwigs/forward exchange contracts In the last few weeks, we have been hearing of the top Indian IT service export companies declaring their Q2 results and almost all of them without doubt have been hit by a rising rupee. I have written an earlier post on the same topic and it made for interesting analysis back then – https://ecofin.wordpress.com/2007/05/10/currency-markets-is-the-indian-rupee-really-appreciating/ […]

  2. […] In the last few weeks, we have been hearing of the top Indian IT service export companies declaring their Q2 results and almost all of them without doubt have been hit by a rising rupee. I have written an earlier post on the same topic and it made for interesting analysis back then – https://ecofin.wordpress.com/2007/05/10/currency-markets-is-the-indian-rupee-really-appreciating/ […]


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