In the late sixties, fuelled by America's growth and consumer spending, the dollar was the king of all currencies. But then the unthinkable happened in the mid-seventies, the dollar crashed and along with it, it dragged with it many countries into recession.
So is history repeating itself. The dollar has fallen consistently with respect to other major currencies, and economists believe that this trend can only continue. Although Bush was re-elected on the promise of a strong America, that has remained as only rhetoric in the case of the dollar. The Bush administration has remained content to watch the dollar fall, so as to present a better picture of its fiscal and revenue balance sheet and its trade deficits. Central banks of various countries including India, China and Russia have tried to prop up the dollar artificially in order to prevent a sharp fall in the dollar.
A falling dollar could have ramifications for India. The biggest hit would be the exporters, especially the IT sector. Inspite of positive outlook, increasingly thin margins could be squeezed further by the appreciating rupee. Assuming constant billing rates and a 25% net margin on revenues software firms will have to raise volumes by 4% each year to counter a one percentage depreciation in the dollar. No wonder that analysts have written off the technology industry due to the depreciating dollar. In order to maintain profitability, companies will then be forced into cost cutting measures.
While exporters might complaint about the depreciating dollar the Indian consumer will be smiling all the way to the shopping malls. Cars, Computers, Notebooks, Casio digital diaries, Cameras, Mobile phones, Television sets, Branded Shoes Shaving systems would be cheaper. Holidays to Europe and the Alps would no longer remain a rich man's vacation, as the appreciating rupee would facilitate cheap foreign travel could be more cheaper.
A rising rupee could also mean cheaper crude oil imports, resulting in lowered costs of petroleum products for the common man. But this could be offset by rising crude oil costs especially due to the constant terrorist threats over the last couple of years.
On the macro-economic front, the falling dollar could result in a huge rush of foreign investment into India fueling explosive economic growth as well as high inflation and overpriced assets.
So, the jury is still out on how the falling dollar could impact India's economy and ultimately you. However, one thing is sure, if you are in the IT industry, don't expect huge salary raises the coming year.
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