What it means
The rupee is a managed floating currency, which means its value against others such as the US dollar is set mostly by market supply and demand. The central bank steps in from time to time to smooth out sharp swings, using its foreign exchange reserves.
For a global business, the exchange rate affects almost everything. An exporter in India earns more rupees when the rupee weakens, while an importer paying for goods in dollars finds them more expensive.
The currency is not fully convertible on the capital account, so there are rules about how much money can move in and out of the country and for what purpose. Foreign companies setting up operations or investing should plan for approvals, reporting and the timing of profit transfers.
Treasurers normally manage rupee exposure with forward contracts, which lock in an exchange rate for a future date, and with natural hedges, such as matching rupee costs with rupee revenues. Because the rupee has tended to weaken against the dollar over long periods, the cost of hedging has often been significant.
Rupee amounts are written in the lakh and crore system, where 100,000 is a lakh and 10,000,000 is a crore. Finance teams reading Indian reports should be aware of this, as it changes where the commas fall and can lead to mistakes of scale.
Foreign investors also face the cost of converting money in and out of rupees, including the gap between buying and selling rates charged by banks. For a large payment, even a small difference in the rate can amount to thousands of dollars, so it pays to compare quotes rather than accept the first one.
In practice
Real-world examples.
Example
A US software company pays an Indian development team in rupees. The finance director budgets the annual payroll of 120,000,000 rupees at a planning rate and asks the treasury team to hedge half of it with forward contracts. At a planning rate of 80, that payroll is $1,500,000, so a move in the rate from 80 to 81 rupees per $1 lowers the dollar cost by about $18,500. The team therefore tracks the rate monthly and updates the forecast whenever it shifts materially.
Example
An Indian exporter of textiles invoices a European customer in dollars. When the rupee weakens, the exporter's rupee earnings rise, which improves margins but also exposes the business to a reversal.
Example
A global investor builds a portfolio of Indian equities. Even if share prices rise 10%, a 4% fall in the rupee reduces the return in dollars to roughly 5.6%, so the investor monitors both the shares and the currency.
Formula
Calculation
Value in dollars = Amount in rupees / Exchange rate (rupees per $1)
Suppose, purely for illustration, that the rate is 80 rupees per $1. A supplier invoices a company 4,000,000 rupees for services. The dollar cost is 4,000,000 / 80 = $50,000. If the rupee weakens to 84 per $1 by payment date, the cost falls to 4,000,000 / 84 = about $47,619, a saving of roughly $2,381. If it strengthens to 76 per $1, the cost rises to about $52,632.Case study
Seen in the real world.
Lotus Analytics is an illustrative, fictional data company that opened a support centre in India. It expected costs of 60,000,000 rupees a year, which at the planning rate of 80 per $1 meant $750,000.
During the year the rupee weakened to 84 per $1, and the dollar cost fell to about $714,286. The finance team was pleased, but the company's Indian clients, who paid in dollars, began to ask for lower prices.
The fictional chief financial officer decided to hedge part of the costs and to review pricing every quarter. The illustrative lesson is that currency movements can help one side of the business and pressure another. Lotus now reviews its rupee exposure with its bank every quarter and reports the effect to the board.
Watch out
Common mistakes.
- Quoting rupee figures without the unit, when lakh and crore notation can make numbers look ten or a hundred times different from what the reader expects.
- Budgeting at today's exchange rate and ignoring the risk that it moves, which can change the dollar value of costs and profits.
- Assuming the rupee can be moved freely across borders, when capital controls and reporting rules apply to many transactions.
Questions
People also ask.
What is the code for the Indian rupee?
The international currency code is INR, and the symbol is a stylised letter R with two horizontal bars, used in India and on price tags.
What is a paisa?
A paisa is one hundredth of a rupee, and the plural is paise.
Who sets the value of the rupee?
The market sets it through supply and demand, and the Reserve Bank of India intervenes at times to reduce volatility.
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