One of the predictions for 2012 has been the rise in the value of the Rupee, the most recent being from First Global's Shankar Sharma. While this blog will not try to analyze if it will happen or not, we will take a look at some interesting impacts of such an appreciation.
Apart from the effect on imports and exports, a rising Rupee impacts several other things. One of them is the stock market.
Foreign investors are big beneficiaries of a rising rupee. Let us see what happens if the Rupee actually goes from being 50 to a Dollar to 45 to a Dollar. Let us take the case of an investor who invests $100 in Indian stock market when the exchange rate is at 50 (thus investing 5,000 Rupees). When the Rupee appreciates and the exchange rate becomes 45, the investor can get back $111 (5,000 / 45). Thus the investor actually makes a return of 11% over and above any stock market returns that he is making!!
As more foreign investors try to take advantage of the rising Rupee they will have to buy Rupees (to buy shares of Indian companies). As demand for Rupees increases, it will lead to further appreciation in the Rupee (which will further increase the effective stock market returns for the investors)!!
Thus appreciating Rupee increases the effective returns for foreigners and as they invest more money in India the Rupee goes up further - leading to a cycle.
There are some other interesting impacts of the Rupee appreciation, which we will see in the next post..
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good one, very informative..
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