THE RUPEE’S (INR) appreciation during the last six months or so has taken the wind out of India’s corporate sails. INR has appreciated by nearly 9% against the US dollar (USD) in the past six months and approximately 6% against the British pound (GBP) and about 5% against the Euro (EUR).  All exporters, especially IT companies, have been severely hit by the appreciation of the INR. On the other hand, currencies of Taiwan and Hong Kong are depreciating, posing a problem to Indian exporters in the global market. IT and the services industry will lose its competitive advantage if the currencies of their major global competitors do not appreciate as much as the INR. The Rs. 1,400 crore package announced by the government to mitigate the hit taken by Indian exporters is just not enough to heal the wound.

But there is another side to the story. Certain sections of the economy are welcoming the appreciation. This is because of the following key reasons:

Firstly, the IT industry which is strongly lobbying against the appreciation of the INR should realize that its phenomenal growth during the last decade is partly because of INR depreciation too. INR depreciated by almost 100 percent against the USD from a level of 25 in 1992 to 48 in 2003. Further, Indian economy needs development of infrastructure which warrants huge investments. A big chunk of the said investments must come from overseas. The host country’s currency, viz., INR, must appreciate to instill confidence into overseas investors. 

Secondly INR appreciation is welcomed by those companies with overseas borrowings. Significant levels of foreign currency – denominated, especially USD-denominated loans generate forex gains because of reduced interest payout occasioned by the rising INR. Companies like Ranbaxy and L&T have been able to generate forex gains in the last quarter because they have substantial exposure to ECBs.

Thirdly, major Indian stock indices are able to scale new peaks because of recent appreciation in the INR. It has been proved beyond any doubt that there is a very strong correlation between our stock indices and the parity value of the rupee vis-à-vis major currencies like the USD. Analysts point out that during the last year Sensex and INR exhibited a correlation of approximately 80% as against the 30 - 40% exhibited in the last three years. FII’s who have heavily invested in India are reluctant to sell off mainly because of the appreciating INR.

Lastly and most importantly, INR appreciation has helped control inflation. One of the reasons for softening of inflation during last few weeks may well have been the appreciation of INR.

Therefore INR appreciation should be viewed in the broader context of its impact on the economy as a whole. The appreciation of the INR has helped in bringing down the country’s import bill particularly that of oil imports which easily accounts for more than a third of all imports. This in turn helps the country in bringing down the trade deficit. Industry will be able to source its inputs from abroad at a cheaper price and hence can export more. India Inc should learn to live with INR appreciation and try to exploit it to the hilt.