FALL OF RUPEE: IMPACT ON COMMON MAN AND THE IT INDUSTRY

With the depreciation of a currency, the cost of living essentially goes up in that country or region(s) substantially; for the simple reasons that, more money has to be paid for the imports and the exports will fetch lesser returns than before, with a falling currency. Its GDP[1] is greatly influenced. Its EXIM (Export-Import) on goods and services that reflects its economic health gets adversely affected by the depreciating currency, because exchange rates impact the manufacturing/production costs of products and indirectly their prices as well.

The Rupee Vs Dollar issue has been a cause of concern for the common man more than the IT companies relatively. Whenever the rupee depreciates, any effort by our central bank (the RBI) to control the slide, results in a higher inflation. In fact, with dollar being the reserve currency of the world, the United States intelligently transfers inflation to other countries. A higher inflation impacts the lives of the common man impacting his day to day activities vividly. In contrast, with the depreciating rupee (as against the dollar), the exports tend to increase, even though the margins are lesser than before. India’s IT industry is the highest exporter of software products and services and the falling rupee helps that part of the IT industry that works on dollar based transactions in presenting positive quarterly results and an impressive balance sheets. On the other hand, the other part of the IT industry that services Indian firms and deals in rupees will be impacted by the ensuing high Inflation. So the impact is of mixed type.

Whenever the rupee depreciates against the dollar, the following phenomena are common. A higher demand for dollar due to lesser availability; a reduced demand for the rupee due to its easy availability (a heated economic situation); infusion of more dollars into the market by RBI to stem the slide, results in the reduction of FOREX reserves which is dollars; a higher infusion of dollars into the market by external investors (investors from outside the country) there by further depreciating the rupee.  Any effort to fix the above phenomena, almost always results in a higher inflation.

Through macroeconomic studies, the behavior of an economy as a whole can be studied effectively. Macroeconomic theories relate the phenomena of GDP, unemployment, and inflation. From a macroeconomic point of view any volatility in exchange rates (for ex. rupee Vs dollar) can drastically impact these macroeconomic parameters as discussed below.

From the perspective of a common man:  The original version of Okun's law[2] states that a 3% increase in the nation’s total production would lead to a 1% decrease in unemployment. When there is inflation, it affects the common man in terms of his purchasing power. Prices will increase and with increase in prices people will find living tough as their disposable incomes reduce. The problems of a wage-price spiral – price rises can lead to higher wage demands as workers try to maintain their real standard of living. Higher wages over and above any gains in labor productivity causes an increase in unit labor costs. To maintain their profit margins prices are increased. The process could start all over again and inflation may get out of control. In a theoretical world, a 2% wage increase during a year with 4% inflation has the same net effect to the worker as a 2% wage reduction in periods of zero inflation.

Depreciation of the rupee as against the dollar directly impacts the remuneration, the various loans and interest rates, the monthly grocery bill, the cost of luxury goods like Cars, Smartphones etc the vacation expenditures, the dining cost and last but not the least, the increased surcharges and taxes on various fuels like Petrol, Diesel, Kerosene, LPG etc. With a major dependency on imports for its energy needs, the Indian government is forced to increase the prices of fuel, also increasing surcharges on the fuel to fund its governance and the various development programs. The depreciation of the rupee has considerably affected the price of the edible oil in a big way, as we import nearly 60-70% of our requirement. FMCG, or Fast Moving Consumer Goods, such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are more likely to become more expensive. High raw material costs (since most of it are imported paying more rupees than before) will result in a higher retail prices for the common man.

The investment towards foreign education will be impacted directly with a depreciating rupee. One has to spend more rupees to send the same amount of dollar’s to their sons/daughters. The education loans also tend to become costlier. When the cost is in dollars and the borrowing is in rupees, students may fall short of funds as the loan may be based on the initial loan agreements. Vacations abroad have become costlier too for the same reason.

Property costs have gone up because of a depreciating rupee. Due to heavy inflow from NRIs to invest on properties (with dollar fetching more rupees), the increased demand has lead to increased property prices. Inflation can also cause a reduction in the real value of savings - especially if real interest rates are negative[3]. Many pensioners who are on fixed pensions will find it impossible to handle the effects on inflation.

A depreciating rupee and the accompanied inflation also have resulted in more people looking for opportunities abroad for various obvious reasons. This will lead to increased brain-drain.

From the perspective of the IT industry:  In contrast, for the IT industry, the depreciating rupee has helped in increased revenues but also with an increase cost to attain those revenues.  IT companies that generate a major part of its revenues from the US based projects will benefit majorly because they generate more dollar revenues. At the same time, with increasing operating costs, Sales and Marketing expenses, R&D and Salary costs offshore, IT companies will face more problems due to increased attrition rates that could thwart the very foundation of their business. IT industry as a whole is forced to prey on the available talent pool, attracting them with bulky (also tricky) pay packages. This has also resulted in reduced margins.

Additionally, the depreciating rupee is impacting potential upcoming IT contracts and could impact onsite costs and international hiring plans. IT BPO (Business Process outsourcing) business are also facing the heat as any increased revenues due to the depreciating rupee also leads to increased local wages. Outsourcing firms in the US have started to renegotiate the terms of some of the potentially renewable contracts.

            The increased pressure from the Indian government to stem the depreciation of rupee, the IT industry may also be forced to reserve dollars. Loans get tougher for the IT companies with high interest rates. This impacts the overall margins that are very much required to stay afloat in the short/long run. Recruitments in IT firms may have to freeze during times of high inflation, resulting in a higher unemployment rate. Firms may have to cut down on incentives and other perks for the employees. Also frequent restructuring could add to higher cost and reduced margins further enhancing the unemployment rates.

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[1]  GDP measures the value of all final goods and services (output) produced domestically over some given interval of time

[2]  Okun's law (named after Arthur Melvin Okun) is an empirically observed relationship relating unemployment to losses in a country's production

[3] Negative Interest rates is assessed as Deposit rates minus loan rates  (D.R – L.R < 0)