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Bajaj Auto Limited: Trouble with Argentine Peso
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Reference: IVEY-9B19N010-E
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Year: 2015
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Number of pages: 15
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Geographic Setting: Argentina; India
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Publication Date: Apr 29, 2019
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Fecha de edición: Apr 29, 2019
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Source: Ivey Business School (Canada)
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Type of Document: Case
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Industry Setting: Manufacturing;
Description
In December 2015, the new government in Argentina lifted capital controls, leading to a sudden drop in the value of the Argentine peso. This depreciation of the peso had the potential to significantly affect companies that exported goods to Argentina. One such company was Bajaj Auto Limited (Bajaj Auto), an Indian exporter of motorcycles to Argentina. On December 18, 2015, Bajaj Auto’s shares dropped 2.43 per cent and lost over US$212 million in market capitalization. The market was reacting to concerns that exports from the world’s fourth-largest manufacturer of two-wheelers, Bajaj Auto, might be hurt in Argentina, where it was the market leader with over 30 per cent of the market share. Following the 30 per cent decline of the peso on December 16, 2015, there was uncertainty about the future of the currency. What caused Argentina to lift currency controls and float the peso? Why had the Argentine peso depreciated so sharply, and what was its future course? Moreover, how would this affect Bajaj Auto and how could it handle such a crisis?
Learning Objective
This case can be used at the undergraduate or graduate level in advanced courses on macroeconomics, international economics, and international finance. Students who have acquired the basics of balance of payments, macroeconomics, parity relationships in international economics, and causes of inflation will find this case useful as an application of macroeconomic variables and their interconnectedness. After working through the case and assignment questions, students will have developed their ability to do the following: ·Describe the determinants of exchange rate changes and the effects of such changes on exporters, importers, investors, and borrowers. ·Explain the effects of misaligned exchange rates and exchange rate changes on the economy as a whole. ·Outline the interrelationships among key macroeconomic variables such as fiscal deficit, balance of payments, inflation, and exchange rate. ·Apply macroeconomic tools such as the interest/saving curve and liquidity preference/money supply curve, the aggregate supply and aggregate demand curves, and the theory of purchasing power parity.