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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

India's exporters of software services find that the rupee has depreciated sharply against the US dollar, while their costs are mainly in rupees and their revenues are in dollars. Other things equal, what is the most likely immediate effect on these firms?

Depreciation of the rupee raises the rupee value of each dollar of export revenue. Because costs are mostly in rupees, margins improve and the firm can cut dollar prices to gain competitiveness. Imported inputs and dollar debt become dearer, not cheaper.

  1. ARupee revenue per dollar earned rises, improving price competitiveness and marginsCorrect
  2. BRupee revenue per dollar earned falls, reducing margins
  3. CDollar prices of their services must rise to cover costs
  4. DTheir imported inputs become cheaper in rupee terms
  5. Their dollar-denominated debt becomes cheaper to repay in rupees

Explanation

A weaker rupee means each dollar earned converts into more rupees. With rupee costs unchanged, margins widen and the firm can cut dollar prices if it wishes. Imported inputs and dollar debt become more expensive, not cheaper, so those options are wrong.

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