Currency movements and the rupee

In simple terms

An exchange rate is the price of one currency in terms of another. In India, it is usually quoted as rupees per US dollar. If the rate moves from ₹80 to ₹84 per dollar, each dollar costs more rupees: the dollar has strengthened and the rupee has weakened, or depreciated.

The two percentages differ slightly because they are measured from different starting points, as the percentages lesson explains.

What moves exchange rates

• Interest rate differences. Higher rates in a country can attract foreign money, supporting its currency. When rates rise abroad, money can flow out.
• Inflation differences. Over long periods, currencies of countries with higher inflation tend to weaken against those with lower inflation, because their money loses buying power faster.
• Trade and the current account. A country that imports more than it exports, counting goods, services and income, runs a current account deficit and needs foreign money to pay for it. India has often run such deficits, partly because it imports much of its oil, as the crude oil lesson explains.
• Capital flows. Foreign investment in shares, bonds and businesses brings in foreign currency; withdrawals take it out, as the foreign investment flows lesson explains.
• Risk appetite. In global panics, investors often move money to the dollar and away from emerging market currencies.
• Central bank action. Buying or selling foreign currency, and interest rate decisions.

No one can reliably forecast exchange rates over short periods.

Winners and losers

So a weaker rupee tends to help exporters, such as IT services, some pharmaceutical makers and textile exporters, and hurt importers and companies with unhedged foreign debt, such as those relying on imported fuel or components. Many companies are both: an exporter may also import raw materials, so the net effect depends on the balance.

A stronger rupee works the other way round.

Hedging

Many companies use hedging, through forward contracts and other derivatives, to lock in exchange rates for future payments or receipts. Hedging delays and softens the effect of currency moves, but it costs money and does not remove the effect over long periods. Annual reports describe a company's currency exposure and hedging policy.

The RBI's role

The RBI holds foreign exchange reserves, foreign currencies and other assets, built up over time. It buys foreign currency when inflows are strong and sells when outflows are strong. It has generally described its aim as limiting excessive volatility rather than defending a particular level. Its actions in the currency market also affect liquidity in the banking system, as the monetary policy lesson explains.

Currency and foreign investors

Foreign investors earn returns in their own currency. If Indian shares rise 10% in rupees but the rupee falls 5% against the dollar, a dollar-based investor earns only about 4.5%. That is one reason foreign flows react to expectations about the rupee.

Why it matters

Currency moves change the profits of exporters, importers and borrowers, influence inflation through import prices, and affect foreign investors' decisions. Knowing a company's currency exposure helps you understand why its results swing when the rupee moves.

Limitations

Exchange rates respond to many forces at once, and the same force can have different effects at different times. Company exposures are complex and partly hedged, so the simple examples above overstate short-term effects.

Common mistakes

• Assuming a weaker rupee is bad for every company.
• Ignoring foreign-currency debt on a balance sheet.
• Forgetting hedging, which delays the impact.
• Trying to forecast short-term currency moves.

Try it yourself

1. Find the rupee's exchange rate against the dollar a year ago and today, and calculate the change both ways.
2. In an exporter's annual report, find the share of revenue earned abroad and its hedging policy.
3. In a company's balance sheet notes, look for borrowings in foreign currency.