International Trade:
The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.
Petroleum Prices:
The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.
Impact on Inflation:
January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.
As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.
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4 comments:
I would like to correct you. IT is not the worst hit industry; in fact it is the textiles industry which has almost lost more than 50,000 jobs. IT industry is still hiring a huge number of professionals, and they are able to maintain their profit margin. They tried to adjust to this situation by asking clients to pay more and by also by some more ways.
There also other industries that are more affected by the appreciation of rupee than IT industry.Will do a further reasearch and will update. In the mean time will like to hear your prespective.
Hey Maveric,
Good point to discuss about. It is certainly not the worst industry hit by the appreciation. It is just one of the worst industries. It has maintained quite high profit margin all this while and a decrease of 1-2% in profit will not prompt it to any downsizing. Today in the third quarter result, Wipro showed slowest profit growth in last 3 years. But one the other side, smaller industry like Textile and Leather industries are facing more problems because of the marginal profit margin. As per Federation of Indian Chambers of Commerce & Industry (FICCI), sectors such as automobiles, consumer durables, food and food processing, gems and jewellery, textiles, handicrafts, and metal and metal products will be particularly impacted. One reason of non-IT industries getting impacted from this was that many of them banked on the dollar appreciating routinely after signing a contract. Now it is the other way around.
Interesting arguments.. well the entire export sector is facing tough time because of Rupee appreciation. And for those who hadn't hedged their risks it is like a nightmare, thats why profits of IT companies have come down significantly. One more reason for IT industry loosing its shine is the slowdown in the US economy leading to decrease in demands for many IT firms which are solely dependent on US for their business.
Hey guys..what so ever is spoken about IT and ITES, it seems true to some extent, as rupee is being aapreciated day by day nd it must be problematic for mid-size or small upcoming IT firms. But it makes a sense when we talk about sectors like retail, tourism, real state and many more. Money is coming in this business by various ways. So as per my opinion Rupee appreciation is being targeted sector like IT and ITES but at the same time to some extent its also boosting up..the indian economy.
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