By: Souvik Banerjee-85Saurav kumar-79Krishangi kakati-110

Rupee

Depreciation

Reasons and

Effects

INTRODUCTION Exchange rate

price of a country’s currency in respect to other country’s currency

Example: USD vs INR, GBP vs INR, Euro vs INR

Foreign Exchange market

a place to convert currency

authorized currency dealers

Depreciation

a decline in the rate of exchange of one country’s currency in terms of the other’s due to market forces.

Indian currency (INR) has depreciated close to 22% in the last 1 year.

Rupee under attack!From average Rs. 44 in July 2011, it is now hovering between

Rs. 60 and Rs. 61.5

US Dollar vs. Rupee(past 2 months)

What leads to fluctuations? As simple as Demand and Supply Too much dependency on imports When Foreign investors take away the monies! Grim global economic outlook

essentially due to the European debt crisis PIGS!(Portugal, Italy, Greece and Spain)

Lack of firm initiative by government on issues such as allowing FDI in retail.

Recent debacles have further rendered the Indian market unattractive to a certain extent (2G, Coalgate(Coal allocation scam))

Weaker Capital markets Upbeat US jobs Speculation that US Federal Reserve may cut back on

investments into Emerging markets

What is the worry? Leads to costlier imports i.e. higher import costs

Oil imports, Capital goods, Iron and Steel, Coal, fertilizer, pulses, edible oils

Cost of overseas study! Leads to inflationary pressures

Increase in import prices of essential commodities are bound to increase the prices of the final goods.

This makes it costlier for the consumers and hence inflation might be pushed up further.

Higher borrowing costs Foreign currency loans are cheaper due to interest

rate differentials But exchange rate fluctuations may negate it

What is the bigger worry? Increasing Fiscal Deficit!

The difference between total revenue and total expenditure of the government.

Indication of total borrowings needed by government

Contd… Increasing Fiscal Deficit!

Worsening Current Account Deficit

When a country's total imports of goods and services is greater than the country's total export of goods and services.

Balance of Payments (Imports less Exports) worsens makes a country a net debtor to the rest of the world.

Exchange rate risk drives away foreign investors which in turn depreciates the local currency! A key attraction of “higher interest rate” is lost

Credit rating agencies also downgrade India’s rating. Sovereign rating of a country determines investment potential into the

country Thankfully Fitch recently revised India’s outlook to stable from

negative! Impact on Exporters

though benefit initially, also feel the pinch due to: adverse effect on inflation sluggish demand from western world

Current Account Deficit

Current Account Deficit

Oil imports during April-June, 2013-14 were valued at US $ 41875.0 million which was 6.40 per cent higher than the oil imports of US $ 39357.4 million in the corresponding period last year.

The trade deficit for April-June, 2013-14 was estimated at US $ 50180.06 million which was higher than the deficit of US $ 42216.73 million during April-June, 2012-13.

Adding fuel to the fire!

Economic turmoil Slower GDP Hardly at 5% (back to 1991s!)

Political turmoil Central Elections next year Do we have a stable party? Lack of leadership

SCAMs! nearly add up to $1.8 Trillion

Is India’s rupee only fluctuating?

This is 2013 comparison

Shows South African Rand, Japanese Yen have also suffered big time recently

IMPACT ON FALL OF RUPEE AGAINST

DOLLAR:INVESTMENT

POSITIVE IMPACT

NEGATIVE IMPACT

How to combat? RBI’s role:

Using FOREX reserves (nearly $300 billion) Easing Control norms

can increase the FII limit on investment in government and corporate debt instruments.

can invite long term FDI debt funds e.g. infrastructure sector. can enhance the ceiling for External Commercial Borrowings (ECB) to

allow more ECB borrowings.

Initiate key policy reforms

Rolling of Goods and Services Tax (GST), Direct Tax Code (DTC) etc. to enable free flow of currency i.e. supply and demand coherence

Oil imports can be staggered.

Encourage and increase the flow of foreign investments into India.

Invite long term FDI in infrastructure sector.

Government can consider temporary import compression.

Gold imports should be restricted.

Export promotion

ImpactGROCERY BILL:

High inflation has been pinching you for more than a year now. Now,

the weakening rupee has made crude oil, fertilisers, medicines and iron

ore, which India imports in large quantities, costlier. Though these items

are not for your daily consumption, they impact your finances indirectly.

FOREIGN EDUCATION :

Students who have taken loans to fund their foreign degree are also

bearing the brunt. Education loans are usually in rupees, but as students

pay their expenses in a foreign currency, the cost of education and stay

has increased. 

JOBS AND REMUNERATION:

 Every industry which is dependent on imports will have to face an

increase in cost of production and operations. The information technology

sector stands to gain, but global recessionary conditions may set off the

impact.

Contd…VACATIONS:

The falling rupee is bad news for itinerant Indians and vacationers to a

foreign country. Air fares are going up due to an increase in fuel

surcharge. The stay will be costlier by at least 3-5%. Also, shopping can

become expensive by 5%. Eating out will also be costlier by the same

percentage.

BUYING A CAR:

The depreciation of rupee has impacted the automobile sector in three

ways. First, input costs have risen as these companies use imported

components. Second, some companies will have to pay higher royalty

to foreign parent firms. Third, many have foreign currency loans in the

form of external commercial borrowings and foreign currency

convertible bonds.

ENTERTAINMENT:

The imported paperback, your favourite pizza and the latest laptop will

also become more expensive. There is an increase in the cost of

imported books as well as the cost of sourcing them.

Predictions!!!

Conclusion

The widening current account deficit (CAD) and uncertain political situation in the

country may weaken the rupee further against the U.S. dollar this financial year.

With the CAD at a record high, the Indian currency will be susceptible to a sudden

reversal of flows, and, as a consequence, the recent real effective exchange rate

appreciation could worsen the underlying imbalance.

Uncertainty in Europe will make investors to look for safe investment options,

particularly the U.S. dollar. This flight of funds will result in appreciation of the

U.S. dollar against other currencies.

Conclusively, appreciation and depreciation of rupee cannot certainly be taken

as beneficial to the Indian economy in general. On one hand the rupee

appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation

will affect importers. So now it depends on what the future has to reveal for,

how effectively the central bank can balance the FX rates with little impact to

the relative areas of FX usage. Can the Dollar remain king or not, is no longer

a million dollar question, but a million Rupee question!