UNIVERSITY INSTITUTE OF APPLIED MANAGEMENT

SCIENCES

MBA - RETAIL MANAGEMENT (SEMESTER 2)

Business Environment

MBA-2001

Impact of Devaluation of Indian Rupee

SUBMITTED TO: SUBMITTED BY:

Prof. Anupreet Kaur Mavi Navneet Kaur (23046)
UIAMS
Panjab University
Devaluation means reduction in the value of currency with respect to goods, services or other
monetary units with which that currency can be changed. So, when we talk about currency
depreciation in the Indian context, it means that the value of the Indian Rupee has fallen with
respect to the US Dollar. This decline in the value of Rupee has an impact on the Indian
Economy. When the rupee depreciates, the imports become more expensive. It proves to be
fruitful for the IT sector, textile industry and the agriculture industry. Also, when the value of
Rupee declines, the imports become more expensive and this leads to higher inflation in the
economy. So, for the domestic population, even the basic essentials become expensive. This
adversely impacts the overall standard of living of the Indian People. On the other hand, there is
an increase in the foreign direct investments as well as foreign institutional investments. This
leads to a tremendous increase in the foreign exchange reserves. Because of devaluation of rupee,
the petrol, food and raw material will become more expensive. This will reduce demand for
imports. Current account deficit is the difference of exports and imports. Because of devaluation
the imports are decreasing and exports are increasing. These situations reduce the current account
deficit. There would be a higher burden on the common man because of devaluation of currency.
For example – the prices of fuel, imported goods and fees of abroad universities etc. Are
increased and trips becomes costlier.

Education and tourism part has additionally been influenced with the dip in the value of Indian
rupee. Students, who are studying abroad, will be burdened with the effect of devaluing rupee.
Costs towards the college/university expense and additionally that of living will build, which will
expand the weight of education. Indian rupee depreciation will likewise influence the tourism.
The charges of travel and accommodation will be more costly and this will pull down the interest
impressively which will again cause a negative effect.

The devaluation of rupee has negative impact on the infrastructure sector. It increases the cost of
projects by increasing the cost of raw materials like steel, cement and price of construction
equipment’s. On the other hand, Devaluation of rupee has positive impact on agriculture. India is
world’s largest producer of wheat. So fall in the value of rupee increase the profit of Indian wheat
exporters and similarly the export of sugar, rice, cotton and edible oil etc. are increased. This

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increases the cost of projects by increasing the prices of raw material, transportation, import of
construction equipment, wages and salary of labour etc. Foreign investors bear a loss when the
value of currency is devalued. The devaluation of rupee can only increase the short term
economic growth. But it has negative impact on the long term economic growth. Because of
devaluation, there is a loss of confidence in International and domestic investors. Long term
economic growth is affected by reduction in investment.

Due to devaluation, the prices of goods are increased because of imports are more expensive and
exports are cheaper. So more money is pay for the same products for which less money is paid
before devaluation. So this situation increased inflation. One of the more obvious reasons why the
current depreciation is not to be welcomed is the effect on domestic living standards. There are
several ways in which the falling rupee immediately has an inflationary impact, one of the most
important of which is the price of energy. Since the misguided decontrol of oil prices, it is not
only the globally traded price of fuel but also the exchange rate that determines domestic oil
prices. Both durable consumer goods such as automobiles, white goods and electronic items and
non-durable goods such as soaps and toiletries are all likely to become more expensive. And, of
course, food inflation-the most worrying aspect of recent price movements-is likely to go up as a
well. Students who are studying abroad have to bear the burden of depreciating rupee. Expenses
towards the university/college fee as well as that of living will increase, thereby spelling a huge
burden on the students. Indian rupee depreciation will also affect the tourism. In case of spending
the holidays abroad, it will affect travel charges as well as hotel charges will increase drastically,
excluding shopping and other miscellaneous spending activity. Country’s fiscal health will be
affected as a frail rupee will add fuel to the rising import bill of the country and thereby
increasing its current account deficit (CAD). A widening CAD will definitely pose a threat to the
growth of overall economy. Car companies are already revising their prices as they are dependent
on  several things like imported raw material, borrowings in foreign currency, pay royalties to
their parent firms and have loans. Consumers of imported paperbacks and gizmos should be ready
to pay more. Marketing companies will absorb the increase in cost but there might be cases when
the consumer may have to bear the burden. There will be shrinking  of pay packages. Industries
that depend on imported raw material will cut costs by two ways either by reducing salaries or
human resources. This won’t affect them those who are paid in dollars. The rupee’s decline

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affects everyone in the economy because it feeds directly and indirectly into general inflation,
which is a continuing problem even as output growth decelerates, and therefore hits common
people hard. There are several ways in which the falling rupee immediately has an inflationary
impact, one of the most important of which is the price of energy. Since the misguided decontrol
of oil prices, it is not only the globally traded price of fuel but also the exchange rate that
determines domestic oil prices. Going by the way the economies in the euro zone and the US
have been behaving, it would be naïve to expect that the export earnings would be contributing
significantly to foreign exchange inflows in the near future. The govt should concentrate On
correcting the economic fundamentals rather than indulge in soap operas in a run up to the
election. A better co-ordination with RBI is required rather than blame game. Apart from all the
political parties should come together in fixing the problem and getting back the investor’s
confidence. The equity market has been volatile for some time now. So, the fii’s are in a dilemma
whether to invest in India or not. Even though they have brought in record inflows to the country
in this year chances are they may be thinking of taking their money out of the equity market
which might again results in less inflow of dollars in India. Therefore, decrease in supply and
increase in demand of dollars results in the weakening of the rupee against the dollar.

A depreciating rupee could put inflationary pressure on the domestic economy. The rising landed
cost price of crude oil has resulted in the rise in prices of petroleum and diesel which in turn has
increased the cost of transportation of goods that also include many food items. Fluctuations in a
currency’s value affect a country’s real estate in a number of ways – beginning with the cost of
raw materials, labour and transportation to subcontracting builders, engineers and architects. But
despite the Indian rupee hitting an all-time low of 74.04 against the dollar, Indian realty can still
see a silver lining. A weaker rupee against the dollar makes investing in India cheaper for Non-
Resident Indians (NRIs) and foreign investors. Here’s a quick look at how the falling rupee will
affect different players in Indian real estate. NRIs and foreign investors are definitely the biggest
beneficiaries from the slump of the Indian rupee. But all is not lost for Indian investors and
homebuyers. In order to attract more buyers, property developers will begin offering their projects
with several attractive offers such as easy payment schemes, pre-booking discounts or exclusive
prices, free instalment of home appliances, etc. While both Indian and foreign investors can
benefit from the depreciating rupee, investors just entering the market will have to be cautious.

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There are high chances of properties being overvalued, and if they aren’t careful, they could
suffer from wealth erosion if they buy the wrong property and the market does not remain the
same way after the rupee normalises. Overall, the rupee value against the dollar while low does
provide plenty of opportunities to invest and grow your wealth. All you need to do is choose your
properties wisely and invest with a long-term horizon to reap significant returns once the market
stabilises.

The direct and immediate impact of the exchange rate is on the exports and imports of a country.
When the rupee depreciates, it loses value with respect to the dollar. This means it takes more
rupees to exchange with a dollar.

Most of the international trade happens in US dollars. Therefore, as rupee depreciates, exports
become more profitable, because the exporter earns more rupees for exchanging dollar. On the
other hand, imports become expensive as the importer needs to pay more rupees for the dollars
billed. Industries linked to exports like pharma and IT benefit with depreciation, whereas those
industries linked to imports (or having vital components of their product imported) have to bear
higher input cost, which is ultimately passed on to the end users. Petroleum is India’s largest
import item. Any price rise in petroleum has a trickle-down effect on the cost of goods where
transportation is an important component of the cost. For example, food grains and vegetables.
Similarly, for industries where petroleum products are the major input factors. Depreciation by
itself would not impact your long-term portfolio if it is a well-diversified one. Nevertheless,
individual stocks may see short-term price movements, if they are in the export or import
business, or are financing them.

While planning investments for goals such as foreign education or travel, bear in mind that rupee
depreciation might impact the allocation you have to make towards these goals. Tuition fee,
accommodation and other living expenses would cost more in rupee terms as the rupee weakens.
Similarly, your foreign trip would cost more, making shopping and other local spends more
expensive. So, evaluate whether your current investments for these goals need to be hiked and
make adjustments accordingly.

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All in all, when compared over a period, a weakening rupee can make your household spends,
foreign travel and education more expensive. It is a good idea to include the effect of rupee
depreciation while planning goals involving foreign spends. Your long-term mutual fund
investment portfolio is not likely to be impacted by rupee depreciation. However, investments in
foreign funds could benefit, provided the foreign stocks in the fund perform well too.

As an impact of costlier raw materials, Indian companies may face challenges in the global
market as the cost of production of such companies will be relatively higher than that of other
foreign competitors. This will affect the revenue generation of Indian companies compared to
their foreign competitors. As per a study conducted by Morgan Stanley, gross revenue margins of
companies are at decade lows, mainly due to higher raw material costs and tougher competition.
This will encourage companies to shrink the remuneration packages or human labour.

A nation focuses on selling goods and services to other nations in surplus than that of purchasing
from other nations. Hence, maintaining the required amount of foreign exchange in the economy
for the growth and development of the country. However in case of India, the deficit has been
increasing and this was due to major setback on the depreciation of Indian rupee. It is assumed
that the fallen in rupee to a certain extent is good as it helps the market to correct itself in the
course of time. The movement of the value of a currency will not cause much effect on the
economy if it is for a short run. The regulatory bodies in India have taken various corrective
measures to curb the volatility of the currency fluctuation. However one needs to wait and see
how much it can bring some kind of relief to the economy. It is inferred that the fall in the
estimation of Indian rupee has a few outcomes which could considerably affect Indian economy.