How depreciation of currency can create problem for a company
Due to globalization, multinational companies raise their loans in foreign currencies. So depreciation of currency will create problems to pay the loan.
e.g. Let us assume company X in India has taken loan from some bank in USA in dollars. At the time of taking loan exchange rate was Rs.50 per dollar.
Due to certain macroeconomic instabilities, let us assume indian currency depreciated. Now the exchange rate is Rs. 60 per dollar.
So company has to pay more money now.
So devaluation of currency brings potential ruin to companies that have borrowed in foreign currency.
And how does depreciation of currency affect companies like the IT services industry?
ReplyDeleteFor a IT services company or a company that exports goods outside, depreciation will help......
DeleteIT companies that are based out in India will earn more because for the same dollar they will be getting more money.Also people who are working Onshore will benefit because due to rupee depreciation the salary which they are earning when converted to rupee will increase automatically..
DeleteYes. You are right sir.
DeleteBecause the debt on IT companies is most of the times zero.
But companies like Tata steel etc. have huge debt on their books. This debt was
Raised during low interest rates in last decade. This was foreign debt actually.
Now when the economy is going through rough patch , this debt is pinching these companies.
I wanted to know how the trade deficit affects the common man ? In india as well as in the US?
DeleteLeo
Read my blog post on current account deficit...
Delete