Dollar to Rupee risks. Disadvantages.
1. The very nature or structure of the Dollar Rupee market can be harmful because it is small, thin and illiquid. Thus, dealer spreads are quite wide and in times of volatility, the price can move in large gaps.
2. Impacted in full by the Trend of the market. For instance, if the Rupee is depreciating, its impact will be felt in full by an Importer.
3. Dollar to Rupee exchanging, in particular, brings the following risks:
1) Lack of Flexibility...Payables once covered cannot be cancelled and rebooked.
2) Unpredictability of the Dollar to Rupee rate. The Rupee is not a freely traded currency and hence extremely difficult to predict. The normal tools of currency forecasting, such as Technical Analysis, are best suited to freely traded markets.
3) Lack of Information... Information on Dollar to Rupee and Rupee to Dollar rates is not freely available to all market participants. Only subscribers to expensive "quote services" can get accurate information.
Advantages of Major currencies
1. By diversifying into a more liquid market, such as Euro-Dollar, the risk arising from the Structure of the Indian Rupee Market can be hedged.
2. Trends in one currency can be hedged by offsetting trends in another currency.
3. These constraints do not apply in the case of the Major currencies:
1) Flexibility...Hedge contracts in Euro-Dollar or Dollar-Yen etc. can be entered into and squared off as many times as required.
2) Predictability...the Majors are much more predictable and liquid than Dollar-Rupee and hence Entry-Exit-Stop Loss can be planned with ease, accuracy and effectiveness.
3) Free Information...The Internet provides LIVE and FREE prices on these currencies.
The biggest beneficiaries from the Rupee appreciation are importers, as the Dollar is now worth less for every rupee or to put it in different terms, less rupee can buy more dollar denominated assets/commodities/goods. Among the importers, companies from energy dependent sectors are likely to benefit in a significant manner (energy, paints and few textile majors). Companies that source raw materials from the global markets and are largely domestic demand driven could potentially witness margin improvement. Besides companies, rupee appreciation is also a positive for the government's financials and capital goods sector (most of the equipments are imported, as the country is technology deficient).
Many factors affect the Rupee rate. Every serious event in one of the leading G-8 countries may lead to fluctuations of the unstable Indian currency. Not to mention jumping and chaotic oil prices.
Without trying to be 'doomsayers', investors need to take a balanced view on factors like exchange rate, interest rate trend in the US and so on, before jumping onto the hot 'India story'.