Rise of the Rupee

We have all been hearing how the rising rupee is having a negative impact on the exports, especially the IT/BPO sector where the primary USP was the exchange rate. It is a simple concept - rise of rupee results in less rupee per dollar, therefore, for the same number of dollars you get less rupees eating into the profit margins of the company. The worst case is when the product pricing does not remain feasible any more and poses a risk of losing the business to some other country.

I think, however, that it is important to look at the situation over a period of time rather than in the immediate short term. There are two sides of the international trade equation: Imports and Exports.

A rising rupee helps the imports because the country needs to shell out less dollars for the same amount. We all know that our trade deficit has always been negative (which means more imports), thus, a rising rupee will benefit the exchequer.

In addition, the rising rupee makes the prices in the domestic market stable and controls the inflation. One of the negatives of the rising rupee is that the salary burden would increase for companies. A controlled inflation in the market would limit the increase in salaries over the next few years, thereby reducing the salary expenditure for companies compared to the situation where the salaries had to be increased at a higher rate. The companies would remain competetive and thus the impact of a rising rupee in a span of a few years may not be negative.