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Impact of Dollar-Rupee Fluctuation on Indian Economy

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Impact of Dollar-Rupee Fluctuation on Indian Economy

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  • November 9, 2009
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Introduction:
There has been constant fluctuation in the exchange rate of US Dollar (USD) versus the Indian Rupee (INR) in the last few months. From the year high of Rs. 51.88/$ in April ‘09 it has declined to Rs. 46.99/$ in the first week of November ’09. A lot is being debated about the impact this fluctuation on the Indian Economy. We shall take an overview of Forex - Inflow and Outflow, mainly in conjunction with the Dollar Trade and the effect of USD-INR Exchange rates.

The Forex rates are determined by market forces and are based on demand & supply of these currencies. If supply exceeds the demand, the value of the currency depreciates, as is the case with US Dollar against the Indian Rupee (INR), since there is a huge inflow of foreign capital into India in USD.

Impact on Indian Economy:
The main Inflow and Outflow can be categorized as follows:

Main USD Inflow:
1.Export earnings:
2.IT Sector Earnings
3.NRI Remittances
4.Foreign Direct Investments (FDI)
5.Portfolio Investment
6.Loans from other governments, IMF, World Bank, etc
7.External Commercial Borrowings (ECB)

Export earnings:
This is mainly from textiles, ready-made garments, machinery, chemicals, leather products, handicrafts, gems & jewelry. The USD converted to INR received from the sale/export of these would depend on the Exchange Rate. If a sale/export worth $100 was made in the month of April, the exporter would receive Rs. 51.88/$ i.e. Rs. 5188/-. If the same sale/export were to be concluded in the month of November 09, he would receive Rs. 46.99/$ amounting to Rs. 4699/- thereby making lesser profits. Garment Exporters are strongly hit due to the appreciation of INR as their business survives mainly on large dedicated orders and increasing rates would mean cancellation of the order.

IT Sector Earnings:
In case of IT services, the provider in India receives less INR for the same USD rates finalized for the project. He cannot afford to hike the rates to...