Currency strength - pros and cons

I had a long discussion with a friend yesterday about the impact of full convertibility of the Rupee on Indian I.T companies.

The comparion of a free-floating curreny(like the $) with a 'hybrid' one like the Rupee or the Yuan - where the Central bank intervenes to maintain stability, is long and for macroeconomics buffs. It is important to understand the impact of currency change on various sectors of the Indian economy.

Indian I.T companies like Infosys, Wipro etc earn the bulk of their money from exports. Thus, a weaker domestic currency is better for them since foreign companies get more bank for their outsourcing dollars(check out my postings on March 28). These I.T firms make more money while keeping their costs more or less the same, and hence earn higher profits.

On the other hand, Companies that depend on imports from foreign countries suffer since they have to foot a larger bill on account of a stronger foreign currency. Again, in India since the oil companies are not entirely market-driven on account of various government interventions, this correlation is not 'directly arithmetical'. But, you get the idea.

If one does have the time to study Forex markets, then be cognisant of the dynamics between currency markets and their impact on different sectors of the economy. Will help you make better investing decisions.

Namaste.