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IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

India's rupee depreciates sharply against the US dollar. Which of the following is the most likely immediate effect on an Indian firm that imports all its raw materials priced in dollars and sells only in the domestic market at fixed rupee prices?

The firm's rupee costs rise and its margin falls. Depreciation makes dollar-priced imports dearer in rupee terms, while its domestic selling prices are fixed, so profit per unit is squeezed. It gains nothing from exports because it does not export.

  1. AIts rupee cost of production rises and its profit margin fallsCorrect
  2. BIts rupee cost of production falls and its profit margin rises
  3. CIts costs are unchanged because domestic prices are fixed
  4. DIts export competitiveness improves, raising its sales
  5. Its dollar-denominated debt burden falls

Explanation

A weaker rupee means each dollar of imported input costs more rupees. Selling prices are fixed in rupees, so margins are squeezed. Export competitiveness is irrelevant as the firm sells only at home, and a depreciation raises, not lowers, the rupee value of dollar debt.

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