Falling Dollar: Good or Bad

Supporting Points

• Ladies and Gentlemen: A weakening dollar simple means: If today USD

1.00 = Rs45/- and if dollar is weakening then USD 1.00 = Rs44.00. So a
weaker dollar means for USD 1.00 you can receive lesser Rupees
But this also means that before you had to pay Rs45 for USD 1.00. Now
the same USD1.00 is available for Rs44.00. This can be good for
importers but bad for exporters

• This Impacts the stock markets – If FII with $1 million couldpump in Rs4.5

crores, now he can only pump in Rs4.4 crores. Also it gives FII incentive
to exit since when he entered for USD 1 million he received Rs4.5 crore,
but on his exit he pays only Rs 4.4 crore for the same USD 1 million. This
is a straight return of 2.22%/Rs10 lacs without any effort
Rs 4.5 crore (FII Received- for USD 1 MILLION - his selling price)
Rs 4.4 crore (FII paid- for USD 1 MILLION - his buying price)

• It impacts our exports earnings in Rupee terms. If a foreigner spent USD

1000.00 in India it would imply Rupee earning of Rs45000.00. However
now that same USD1000.00 fetches only Rs44000/-. The smart manager
would be alert to such changes and cover his foreign currency exposure.
It is generally seen that whenever USD depreciates the earnings of top IT
companies takes a hit, impacting not only earnings but also the stock
price. IT companies should be more careful in using adequate hedging
strategies to cover their export earnings.
Yet this is favorable for Oil companies who have to pay in USD for oil
purchases. Previously every USD1 million cost Rs4.5 crore but now to
buy the same oil for USD 1 million costs Rs 4.4crore. So the impact on
the trade deficit is favorable as we can import more oil by paying lesser in
Rupee terms

• It is also favorable for Indian companies seeking to acquire foreign

companies out of retained earnings as they have to pay less Rupees for
every dollar purchased to pay off the acquired company. Perhaps this is
also one of the reasons why we are seeing a huge increase in M&A by
Indian companies. It is not merely new found confidence but also
practical business sense

Opposing Points

• The most important part to analyse is not how much it is falling by, but

why it is falling. Current state of the US economy is causing the Federal
Reserve to put brakes on US household consumption in an effort to
save more. This means that for export dependent economies like India
we not only lose out in terms of reduced Rupee earnings but also
chances are we will receive lesser export orders.

• Even though the dollar is falling and reducing our Rupee earnings it

may lead to a benefit for India as generally physical end user goods
exports will reduce from China as they add less to productivity and cost
cutting, whereas India’s competitiveness is in software which itself is
designed to increase productivity rapidly.
So given a choice to reduce consumption of finished garments,
electronics v/s reducing software consumption that adds to more
productivity and reduces costs, I believe the US will reduce exports
from China.

• While the USD weakens both as a currency and as an economy, the

EU and Asian regions become stronger. This is a good wake up call for
Indian exports sectors to reduce dependency on one nation for growth
and realize the necessity of being able to meet the needs of various
nations who do not have the spending power as the US. This will only
make Indian industry even more competitive as it is easy to sell to the
wealthiest nation, but being able to provide value to those with tight
budgets will ensure our competitiveness even after our so called
strengths such as cheap labour and cost effectiveness fade away.
The viewpoints clearly show that USD/INR appreciation or depreciation
is simply two sides of the same coin. It is really for the smart manager
to figure which side will favour him the most, and to take suitable
hedging strategies.

• India is in a new stage of development where global Merger and

Acquisitions by Indian companies no longer raise eyebrows. Managers
must thus ensure that foreign currency movements do not jeopardize
their global plans by making suitable use of the various foreign currency
hedging strategies with their bankers.