The good side of falling rupee

In ancient days, animals used to be counted as currencies. Horses and cows were the primary units of currency and measures of wealth. Then came the phase when gold and other precious metals played the role. Today, the US dollar holds that position. Rush for dollar decides the strength of other currencies including rupee.

And, rupee continues to lose weight against US dollar. Rupee slipped to 72.96 against a dollar today before recovering 15 paise. The weakening of rupee was punctuated by further rise in crude oil prices by about three per cent. The crude was selling at $81.3 per barrel today.

A falling rupee has been a concern for the government and the Reserve Bank of India (RBI). The government has said that it would explore the measures to curb import to offer some support to rupee. The RBI has been selling US dollars from its forex reserve thereby withdrawing rupee from the market in order to wrest its fall but to little avail.

A weakening rupee presents major problem on two counts. It makes imports costlier and widens current account deficit throwing financial management of the government out of gear. It also offers good news for the export-oriented sectors. Export including software sector has benefitted a lot from rupee's declining health.

The impact of falling rupee can be understood with an example. Suppose you have to buy an imported laptop that costs $1,000. In the beginning of the year when a dollar was valued at Rs 63.50, the phone would have cost you Rs 63,500. But today, at the exchange rate of Rs 72.96, it could cost you Rs 72,960.

Similarly, the cost of your foreign tour and paying fee for study abroad would be about 15 per cent more today than compared to what you had to pay for in January.

While foreign tours for Indians get costlier, touring India for foreigners becomes cheaper. Tourist inflow may go up pushing consumption and raising income of people engaged in tourism sector.

Input costs for articles used in industries go up as more rupees are required to buy the same volume of dollars. This pushes the cost of production and the selling prices of the products. The obvious result is upward inflation.

But does falling rupee only bring bad news to India?

The answer cannot be seen as black and white. There are big grey areas where economy operates. For faster GDP, a slightly upward inflation is essential. A falling rupee gives that push to inflation. But, in a country like India where purchasing power of the masses is not capped high, rising inflation signals sluggish industrial production. The demand for costlier products decreases. A decline in industrial production is usually followed with lay-offs.

However, the falling rupee also presents a great opportunity for the local industries that don’t depend on imported inputs but have export potential. Precious stones and gems, tea and handicraft businesses are in favourable dock. A rising trend is being observed in the software export alongside falling rupee. Its share in GDP has gone up by about 0.5 per cent. This, in turn, creates more jobs in the sector.

A weak rupee means exported items are priced lower despite higher input cost domestically. With rupee falling against dollar, India’s export touched three-month high in August. Export grew by 19.21 per cent in August. Before that, export had grown by 20.18 per cent in May when rupee started falling following hike in interest rate by the US Federal Reserve.

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