Impact on Import due to Fluctuation in Rupee

It is seen that as rupee appreciates, the imports become cheaper, which in turn leads to increase in imports, and vice-versa is also true. Some say this is good as we will get less burden of crude oil bill, especially when experts predict crude oil price might reach $100 a barrel.
Infact, that is one of the reasons that in recent times Energy Companies (Power Sector-Imports Coal and Oil Marketing Companies-Imports Crude Oil) stocks have risen in capital markets.

Impact on Export due to Fluctuation in Rupee

It is seen that as rupee appreciates, the exports drop due to relative cost of Dollar viz-a-viz Rupee decreasing. However, this can be reduced by a concept of Currency Hedging.

Impact on Inflation due to Fluctuation in Rupee

Inflation in simple terms means excess of liquidity. Often it is seen that when inflation is high, the cost of goods start increasing, and vice versa is also true. When there is excess dollar in market, it increases the rupee circulation in the system which in turn increase inflation. However, this can be curtailed by RBI as mentioned above.

Impact on Interest Rate due to Fluctuation in Inflation

It is seen that when inflation increases, interest rate increases, and vice-versa is also true. This is because if interest rate is high, people would like to save from their surplus income due to high return, and would not borrow as well because of high cost of fund.

Impact of all this on Indian Economy

Indian economy is currently undergoing a transition phase that is from a 4-6% GDP growth in late nineties and early millennium to 8-10% GDP since last three years. In management, we always say "process of change is always painful". The RBI is doing a good job of maintaining balance in the system but there is a growing concern over the quality of funds coming into the country. As discussed earlier, whether it is FII or Hedge Fund investing through P-Notes, it is more important to see that an inclusive growth happens in the economy.

Concluded.

Prof. Suyash Bhatt is B.Tech. (Computers) and Master's in Management Studies from Mumbai University with specialization in Finance. He is also NCFM Certified Trainer. Currently, he is working as Faculty for Finance at K. J. Somaiya Institute of Management Studies, Mumbai.