In this essay, we are mainly going to emphasize how the appreciation of the US Dollar i.e., USD against other currencies would impact different sectors of an economy in the context of India. The growth trajectory of the Indian Economy post the Liberalization, Privatization, and Globalization (LPG) reforms has been stupendous. The CAGR of close to 7% for almost 25 years is extraordinary for any economy and India has been able to sustain this growth for such a long period. This growth was coincidental with the growth of the world economy.
However, the Indian economy has undergone some exceptional phases of macroeconomic developments and growth pattern post the Global Financial Crisis. When the world economy was growing at a very tepid pace, the Indian economy was an exception, growing at nearly 8% compounded annual growth and then Demonetization struck the Indian Economy and Goods and Services Tax (GST) was rolled out without proper planning of its implementation. The growth trajectory took a hit for some time and it’s only recently that India’s growth seems to be picking up once again (the last quarter’s GDP growth has reached close to 8.5 %).
Indian Rupee (INR) has depreciated against US Dollar (USD) the most (about 8.3 percent) in comparison with other major currencies such as Euro (EUR), Great Britain Pound (GBP), Japanese Yen (JPY) and Chinese Yuan (CNY) in the last five years. The USD appreciation is due to various factors such as an increase in India’s trade deficit, fears of a trade war, surging oil prices and instability in Eurozone among many others (Anoyn, 2018). The changes in the exchange rates will affect the firms from different industries in three ways.
First, transaction exposure, which is created by the transactions of the firm involving cash flows resulting from activities such as imports, exports, payment/receipt of interest royalty etc. If there is a change in the exchange rate consequent upon the transaction, the revenue and profit margins will be disturbed. For instance, an Indian company exports goods invoiced in USD receivable after three months without knowing the exchange rate of USD/INR. If USD appreciates against INR for three months, the exporter’s INR revenue will decrease. Second, the changes in exchange rates may result in gains or losses in the consolidation of financial statements of foreign subsidiaries. This exposure is known as translation exposure. Third, the changes in the exchange rates might affect the firms’ competitive position in the market and the long-term cash flows. This is known as economic exposure (Eun & Resnick, 2012). The nature of the industries will have decided if they are going to be benefitted or affected by the exchange rate changes.