Fiscal impact of Rupee appreciation

In this article first we take up an interesting effect of the Rupee appreciation on the yellow metal then other relevant aspects.

Rupee appreciation is helping the Indian consumer. While gold prices have touched the roof in global markets, at home the prices have remained at the same level with Indian currency gaining strength.

As dollar continues to weaken against other currencies, gold prices have spurted to cross 28-year-high of $750 per ounce. However, in the domestic market the price remained around Rs9,500 per 10 gram. The Indian currency has appreciated by over 10% in the last one year against dollar. If this was not the case, the gold would have been quoted around Rs 10,500 per ten grams.

The price of gold is normally fixed in dollar term. But as the US currency weakened against euro, yen and rupee, rise in prices in these currencies are relatively smaller than dollar. This drove the demand of the yellow metal in international markets. Americans are also buying gold to hedge against dollar depreciation.

The investment in gold has given a return of 7% in rupee term in last one month. Returns in the last three months, six months and 12 months are 9.4%, 1.8% and 7.8% respectively. But, in dollar term the yellow metal has appreciated 30.5% in last one year. In other currencies return is on the lower side because of their appreciation against dollar. Return in euro on gold investment in last one year is 16%, in pound 14.8% and in yen 26.1%

DSP Merrill Lynch gold fund, which invested in equities of global companies that operate in gold, has appreciated by over 25% in rupee term in the last one month, since it got listed on the stock exchange.

Gold had crossed $750 per ounce in 1979 and if it is adjusted for inflation since then, the present price of the yellow metal should have been over $1,600 per ounce.

As US economy has started showing weakness the US Fed would resort to further rate cut. This will further weaken the currency, which would fuel the demand for the yellow metal pushing its prices up in dollar terms.

Demand for the yellow metal is on the upswing in the domestic market. The consumption of gold in the domestic market is likely to touch 1,200 tons during 2007-08 showing almost a 50% rise from 2006-07 levels.

NRI remittances and higher services exports partially offset the rising trade deficit during the first quarter as India saw its current account deficit widen marginally to $4.7 billion during April-June this year, compared to $4.57 billion during the corresponding period in 2006. But the impact of the rising rupee was visible on software sector with exports rising a shade less than 20% to $8.44billion during the first quarter of the current financial year, compared to the 32% rise during 2006-07.

While most software companies have been hit was evident from the first quarter results, the latest balance of payments data also revealed the impact on other sectors. For instance, export of financial services rose a healthy 42% in the first quarter this year, less than half the 88% growth during the 12 months of 2006-07.

Business management consulting probably saw a bigger impact with receipts dipping from $1.42 billion in the first quarter of the last financial year to $1.39 billion during April-June this year. While on a net basis FDI flows just about managed to stay in positive zone.

Travel earnings showed a growth of 22.2% compared with 19% in the same period last year, mainly reflecting the pattern in tourist arrivals. Private transfer receipts comprising mainly remittance from Indians working overseas rose 46% to $8.6 billion in Q1 of 2007-08 as against $5.9 billion in the corresponding period of 2006-07. While invisible payments grew 18.6%, payment relating to travel services by Indian traveling abroad rose 26.4%.