Explain the implications of rupee falling / rising against dollar on India's (1) Exports (2) Imports (3) Domestic Trade.
India has adopted floating exchange rate system since 1975. In this system market forces determine the value of a currency. Therefore currency fluctuations are natural outcome of the floating exchange rate system. There are two types of currency fluctuation, currency depreciation or devaluation and currency appreciation
In the context of India, currency depreciation means falling of rupee value against dollar whereas appreciation means increasing value of rupee against dollar.
Impact on Exports
Exporters get benefited with the fall of rupee against dollars as they get more rupees per dollar. Also devaluation makes Indian exports more competitive as Indian goods became cheaper in terms of the currencies of foreign countries. This led to increase in exports. In India, Particularly sectors like pharmaceutical, Information technology will get benefited. But in case of appreciation of rupee, exports will reduce.
Impact on imports:
With the depreciation of rupee importers will be affected as they will have to pay more rupees on importing products. This will reduce demand for imports
Being a net importer the Indian economy benefits as far as the impact of inflation is concerned with the appreciation of rupee
Impact on domestic trade:
The fall in the exchange rate will push the domestic prices of imported goods. For instance, since India depends on imports for a large part of crude oil it consumes, a weak rupee will influence petrol and diesel prices
Sectors like aviation and select consumer durables companies which import crude oil or crude oil derivatives are likely to benefit from a strong rupee.
Indian software, automobile and ancillaries, pharmaceutical companies and textiles sectors will be affected the most by stronger rupee since a significant portion of their revenues is dollar denominated.
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