falling value of rupee

8/11/2019 Falling Value of Rupee

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INTRODUCTION

Rupee is the name given to the official currency that is used in several countries including India,

Bhutan, Pakistan, Sri Lanka, Nepal, Mauritius, Maldives and Indonesia. The name rupee comes

from the Sanskrit language word rupyakam meaningsilver coin. Rupee in different regions isdenoted with different symbols most commonly Rs, and Rp. One unit of the currency is

equivalent to one hundred equal paise.

Among all the countries mentioned above that have rupee as their national currency; the Indian

rupee is the most important with respect to value, preference and popularity. India stands among

those countries that discovered the need for a currency and the first rupee coins were issued as

early as in the 16th century. The currency code and numeric code for Indian rupee according to

the ISO 4217 standard are INR and 356 respectively. The currency in India is denoted with the

sign Rs. India retains the reputation of issuing the some of the earliest coins in the history of

mankind. The currency of India i.e. the Indian rupee is also one of the well-establishedcurrencies in the world. The importance of the Indian rupee in the world market is characterized

by the fact that Bhutan and Nepal peg their currencies to the Indian rupee. Moreover, the Indian

rupee is considered a legal tender in Bhutan that has dollorized the currency. Indian rupee does

not use the western number system and has a number system of its own. As in the western

number system, the large values of money are counted in terms of hundred, thousand, million

and billion respectively, in the Indian number system the large values are counted as hundred,

thousand, lakh and crore. The Indian number system is also popular among the countries like

Pakistan, Nepal, Myanmar, Bhutan and Bangladesh. Earlier the rupee coins were made up of

silver and that is where this name rupee is derived from as the word rupyakam means silver

coin in the Sanskrit language. But when the large silver mines were discovered in the UnitedStates of America and parts of European continent, the value of silver declined drastically as

compared to gold on which all the other strong economies were based. As a result, the value of

Indian rupee also declined as compared to other currencies in the world and this incident is called

the fall of rupee.Indian rupee did not use the decimal system and rather was subdivided into 16

annas till 1957. In 1957, the decimal monetary system was adopted and one unit of rupee was

restructured equivalent to 100 equal paise. The currency in the country is issued in the form of

banknotes and coinage, the Reserve Bank of India and the Government of India possessing the

issuing authority for banknotes and coins respectively. The central bank i.e. the reserve bank of

India is entitled to change the banknote series and the Mahatma Gandhi series, which is in

circulation currently, was launched in 1996. The notes are issued in 7 denominations i.e. Rs 5, Rs

10, Rs 20, Rs 50, Rs 100, Rs 500, Rs 1000. Two more denominations for banknotes i.e. Rs 1 and

Rs 2 are still in circulation but no new notes are being printed as coins for both these

denominations are being minted now. Each note depicts the face value of the note in 17

languages. The notes also have some unique features quite often called the security features that

help in avoiding the duplicity and illegal circulation of the notes. These features include


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Mahatma Gandhi watermark

Silver security

Latent image

Micro-lettering

Fluorescence

Optically variable ink

Back to back registration

Coins for the Indian currency are minted in 7 denominations namely 10 paisa, 20 paisa, 25 paisa,

50 paisa, Rs 1, Rs 2 and Rs 5 under the Coinage act 1906. The country has four coin mints one

each at Mumbai (Maharashtra), Hyderabad (Andhra Pradesh), Kolkata (West Bengal), Noida

(Uttar Pradesh). Like in the case of banknotes, the management of circulation of coins is in thehands of the Reserve Bank of India.


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HISTORY

The history of the rupees traces back to Ancient India in circa 6th century BC, ancient India was

one of the earliest issuers of coins in the world, along with the Chinese wen and Lydian staters.The word rpiyais alleged to be derived from a Dravidian word rpa, which means "wrought

silver, a coin of silver", in origin an adjective meaning "shapely", with a more specific meaning

of "stamped, impressed", whence "coin". It is derived from the noun rpa"shape, likeness,

image". The word rpais being further identified as having sprung from

the DravidianHowever, an Indo-Aryan origin is more likely compare Sanskrit rp, n. m. A

form, beauty (Rig-Veda), rpaka adjective and n. m. A particular coinPacatantra,

rpya,*rpiya-, adj. Beautiful, bearing a stamp Pini., n. SilverMahabharata. There is no

evidence of transmission to Indo-Aryan from Dravidian and textual evidence dates to well before

any references in the later Dravidian.

Arthashastra, written by Chanakya, prime minister to the first Maurya emperor ChandraguptaMaurya (c. 340-290 BCE), mentions silver coins as rupyarupa, and other types of coins

including gold coins (Suvarnarupa), copper coins (Tamararupa) and lead coins (Sisarupa) are

also mentioned. Rupa means form or shape, example, Rupyarupa, Rupya - wrought silver, rupa -

form.

Sher Shah Suri, during his five year rule from 1540 to 1545, set up a new civic and military

administration and issued a coin of silver, weighing 178 grains, which was termed

theRupiya. The silver coin remained in use during the Mughal period, Maratha era as well as

in British India. Among the earliest issues of paper rupees include; theBank of

Hindustan(17701832), the General Bank of Bengal and Bihar(177375, established

by Warren Hastings), and theBengal Bank(178491).The Indian rupee was a silver based currency during much of the 19th century; which had severe

consequences on the standard value of the currency, as stronger economies at that time were on

the gold standard. During British rule, and the first decade of independence, the rupee was

subdivided into 16 annas. Each anna was subdivided into either 4 paisas, or 12 pies. So One

rupee was equal to 16 Annas, 64 Paises of 192 Pies. In 1957, decimalisation occurred and the

rupee was divided into 100 Naye Paise (Hindi/Urdu for new paisas). After a few years, the initial

"Naye" was dropped.

For many years in the early and mid-20th century, the Indian rupee was the official currency in

several areas that were controlled by the British and governed from India; areas such as East

Africa, Southern Arabia and the Persian Gulf.

Ancient India in circa 6th century BC was one of the earliest issuers of coins in the world, along

with the Chinese wen and Lydian staters. The first "rupee" is believed to have been introduced

by Sher Shah Suri (14861545), based on a ratio of 40 copper pieces (paisa) per rupee.

The word rpiyais derived form word rpa, which means "wrought silver, a coin of silver",[in

origin an adjective meaning "shapely", with a more specific meaning of "stamped, impressed",

whence "coin". It is derived from the noun rpa"shape, likeness, image".


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Arthashastra, written by Chanakya, prime minister to the first Maurya emperor Chandragupta

Maurya (c. 340-290 BCE), mentions silver coins asrpyarpa, other types of coins including

gold coins (Suvarnarpa), copper coins (Tamrarpa) and lead coins (Sisarpa) are also

mentioned. Rupa means form or shape, example, Rpyarpa, Rpya - wrought silver, rpa -

form.

During his five year rule from 1540 to 1546, he set up a new civic and military

administration; Sher Shah Suri issued a coin of silver, weighing 178grains, which was termed

theRupiya. The silver coin remained in use during the Mughal period, Maratha era as well as

in British India.

The Indian rupee, which was at par with the American currency at the time of independence in

1947, hit a record low of 61.80 against the dollar recently. This means the Indian currency has

depreciated by almost 62 times against the greenback in the past 66 years.

The currency has witnessed a large volatility in the past few years. This volatility became acutein the past three months affecting major macro-economic data, including growth, inflation, trade

and investment.

Managing volatility in the currency markets has become a big challenge for the economic policy

makers in the country. The central bank as well as the government has taken a series of measures

to curb the volatility in the markets.

Despite those measures, therupee continues to depreciate. And the trend is unlikely to reverse

any time soon.

The Indian currency has witnessed a roller-coaster journey since independence. Many

geopolitical and economic developments have affected its movement in the last 66 years. Here is

a broader look at the Indian rupee's journey since 1947:

- India got freedom from British rule on Aug 15, 1947. At that time the Indian rupee was linked

to the British pound and its value was at par with the American dollar. There was no foreign

borrowings on India's balance sheet.

- To finance welfare and development activities, especially with the introduction of the Five-

Year Plan in 1951, the government started external borrowings. This required the devaluation of

the rupee.

- After independence, Indian chooses to adopt a fixed rate currency regime. The rupee was

pegged at 4.79 against a dollar between 1948 and 1966.

- Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965, resulted

in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57

against the dollar.
http://timesofindia.indiatimes.com/topic/Rupeehttp://timesofindia.indiatimes.com/topic/Rupee


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- The rupee's link with the British currency was broken in 1971 and it was linked directly to the

US dollar.

- In 1975, the Indian rupee was linked to a basket of three currencies comprising the US dollar,

the Japanese yen and the German mark. The value of the Indian rupee was pegged at 8.39 against

a dollar.- In 1985 it was further devalued to 12 against a dollar.

- India faced a serious balance of payment crisis in 1991 and was forced to sharply devalue its

currency. The country was in the grip of high inflation, low growth and the foreign reserves were

not even worth to meet three weeks of imports. Under these situations, the currency was

devalued to 17.90 against a dollar.

- The year 1993 is very important in Indian currency history. It was in this year when the

currency was let free to flow with the market sentiments. The exchange rate was freed to be

determined by the market, with provisions of intervention by the central bank under the situation

of extreme volatility. In 1993, one was required to pay Rs.31.37 to get a dollar.- The rupee traded in the range of 40-50 between 2000-2010. It was mostly at around 45 against

a dollar. It touched a high of 39 in 2007. The Indian currency has gradually depreciated since the

global 2008 economic crisis.

- Former finance minister Manmohan Singh, who is now the prime minister, was instrumental in

liberalising the currency regime. The move led to a sharp jump in foreign investment inflows and

boosted the economic growth.

Pre-Liberalization period (1947-1991)

Year 1947: Indian rupee was linked to the British pound and its value was at par with theAmerican dollar. There was no foreign borrowing on India's balance sheet.

Year 1951: Introduction of the Five-Year Plan. The government started externalborrowings. This required the devaluation of the rupee

Year 1947-1973: Indian chooses to adopt a fixed rate currency regime. The rupee waspegged at 4.76 against a dollar between 1948 and 1966.

Year 1966: Indian governments have to devalue the currency to 7.50 against the dollar.

Reason: Two consecutive war China in 1962, Pakistan in 1965

Year 1975 : The rupee's link with the British currency was broken. It was linked to abasket of three currencies comprising the US dollar, the Japanese yen and the Germanmark. The value of the Indian rupee was pegged at 8.39 against a dollar.

Year 1985: It was further devalued to 12 against a dollar


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Post Liberalization Period (Since 1991)

Year 1991: India faced a serious balance of payment crisis. It was forced to sharply

devalue its currency. The country was in the grip of high inflation, low growth and theforeign reserves were not even worth to meet three weeks of imports. The currency was

devalued to 17.90 against a dollar.

Year 1993: Introduction of Unified Exchange Rate System. The currency was let free toflow with the market sentiments. One was required to pay Rs.31.37 to get a dollar.

Year 2000-2010: The rupee traded in the range of 40-50. It touched a high of 39 in2007.The Indian currency has gradually depreciated since the global 2008 economiccrisis.

Year 2011-2012: Former finance minister Manmohan Singh, who is now the primeminister, was instrumental in liberalising the currency regime. The move led to a sharp

jump in foreign investment inflows and boosted the economic growth.

Year 2013 : The Indian currency was around 54 mark in the beginning of the year. Its

fall in June after sliding 8 per cent in May. Indian rupee touching a record low of 60against the dollar on Wednesday (June 26). The Indian debt market has seen an exodusof $3.3billion foreign capital since 21 May 2013. Continuing its free fall, the rupee onMonday breached63-mark a dollar to end at record low of 63.13,recording the decade'sworst single-day fall of 148 paise


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Changing Phase

Money is not an organic creature but its value keeps changing with the society and its economic

conditions.One rupeein 1947 is not the same as one rupee today, both in terms of appearance

and purchasing power.

The value of a country's currency is linked with itseconomic conditions and policies."The

value of a currency depends on factors that affect the economy such as imports and exports,

inflation, employment,interest rates,growth rate, trade deficit, performance of equity markets,

foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking

capital,commodity pricesand geopolitical conditions," says Pramit Brahmbhatt, chief executive

officer, Alpari Financial Services (India), a foreign exchange brokerage.

Income levels influence currencies through consumer spending. When incomes increase, people

spend more. Higher demand for imported goods increases demand for foreign currencies and,

thus, weakens the local currency.

Balance of payments, which comprises trade balance (net inflow/outflow of money) and flow of

capital, also affects the value of a country's currency.

"A country that sells more goods and services in overseas markets than it buys from them has a

trade surplus. This means more foreign currency comes into the country than what is paid for

imports. This strengthens the local currency," says Kishore Narne, head, commodity and

currency research, Anand Rathi Commodities, a brokerage house.

Another factor is the difference in interest rates between countries. Let us consider the recent

RBI move to deregulate interest rates on savings deposits and fixed deposits held by non-residentIndians (NRIs). The move was part of a series of steps to stem the fall in the rupee. By allowing

banks to increase rates on NRI rupee accounts and bring them on a par with domestic term

deposit rates, the RBI expects fund inflows from NRIs, triggering a rise in demand for rupees

and an increase in the value of the local currency.

The RBI manages the value of the rupee with several tools, which involve controlling its supply

in the market and, thus, making it cheap or expensive.

"Some ways through which the RBI controls the movement of the rupee are changes in interest

rates, relaxation or tightening of rules for fund flows, tweaking the cash reserve ratio (theproportion of money banks have to keep with the central bank) and selling or buying dollars in

the open market," says Brahmbhatt of Alpari.

The RBI also fixes the statutory liquidity ratio, that is, the proportion of money banks have to

invest in government bonds, and the repo rate, at which it lends to banks.
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While an increase in interest rates makes a currency expensive, changes in cash reserve and

statutory liquidity ratios increase or decrease the quantity of money available, impacting its

value.

Inflationary pressure

Every generation complains about price rise. Prices shoot up when goods and services are scarce

or money is in excess supply. If prices increase, it means the value of the currency has eroded

and its purchasing power has fallen.

Let us say the central bank of a country increases money flow in the economy by 4 per cent

while economic growth is 3 per cent. The difference causes inflation. If the growth in money

supply is 10 per cent, inflation will surge because of the mismatch between economic growth and

money supply. In such a scenario, loan repayments will be a lesser burden if interest rates are

fixed, as you will pay the same amount but with a lower valuation.

A fall in purchasing power due to inflation reduces consumption, hurting industries. Imports also

become costlier. Exporters, of course, earn more in terms of local currency.

However, if the increase in money supply lags economic growth, the economy will face

deflation, or negative inflation. The purchasing power of money will increase when the economy

enters the deflationary state. If you think deflation will help you consume more and enjoy life

more, you are wrong.

Unless the fall in prices of goods is because of improved production efficiencies, you will haveless money to spend. If you have a fixed-interest loan to repay, your debt will have a higher

valuation. Yields from fixed-income investments made before deflation set in will, of course,

increase in value.

Minting money

A fantasy world where trees have banknotes and bear coins instead of fruits might sound like a

dream come true. Economists will be the devil's messenger in that world when they break the

news that your money is as good as dry leaves.

If you are looking for a machine that can print money, just meet someone who actually owns

one-the government. Money is printed by governments, but they cannot print all the money they

need. When a government prints money to meet its needs without the economy growing at the

same pace, the result can be catastrophic. Zimbabwe is a recent example. After the 1990s land

reforms in free Zimbabwe, farm production as well as manufacturing declined drastically.


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Behind The Fall

Now that we know the factors that determine the value of a currency, how does the rupee in your

bank account and purse stand at present? Over the past few months, since August, the rupee has

been weakening against the dollar.

"The recent fall in the rupee was mainly due to conditions in the euro zone, plunging stock

markets, falling foreign investment inflows and strengthening of the dollar," says Brahmbhatt of

Alpari.

"Rising fiscal deficit and untameable inflation were behind the fall in the rupee. As India runs a

large current account deficit, it needs a constant inflow of dollars, which was not there. High oil

prices inflated the import bill and resulted in further widening of the current account deficit,

which accelerated the rupee fall," says Narne of Anand Rathi.

"The decision by the government to allow foreign investors to directly invest in Indian equity

could bring some capital flows and have a positive impact on the economy and the rupee," adds

Narne.

The rupee has recovered somewhat in January, but the danger still looms. If you need some

foreign currency in the future such as for the tuition fee of your daughter studying in the US or a

summer vacation in Ireland, plan right now and hedge your risk with the help of currency

futures. Consider the basics of currency movements and their likely impact before taking your

next investment decision.


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Reasons for fall in the value of Rupee

The rupee has plunged to an all-time low against the dollar and its fall has become a subject for

debate. The usual discussions on the fall of the rupee bring up macro economics matters such as

slow economic growth, huge current account deficit, rising imports etc.

At the time of independence when India had no foreign borrowings the rupee was at par with thedollar. With the introduction of the 5 years plan and the subsequent requirements for foreign

investments the dollar slowly rose. In 1985, after the Bofors scam, which toppled Rajiv Gandhis

government, the dollar was equal to 12.35 rupees and since the economic liberalization in 1991,

there was a sharp devaluation of rupee and the rupee had dropped to Rs.24.5 against a Dollar.

The dawn of the third millennium gave a further worsened the condition rupee against dollar and

the rupee has hit an all time low of Rs. 65.42 against a dollar on the 22nd of August 2013. Indian

economists are trying hard to chalk out a strategy to counterbalance the falling value of rupee but

it seems the attempts are futile.

There major reasons for the plunging fate of the rupee are:

Current Account Deficit (CAD)

CAD is considered to be the key factor behind the steep volatility of rupee against dollar. CAD

occurs when the total import of goods and services of a country is greater than the total export

goods and services thus making India a debtor to the rest of the world. Indias current account

averaged a deficit worth 1.5 billion USD since 1947 until 2013. In the first quarter of 2013 the

CAD was 18.1 billion and at present it has gone up over 20 billion. This has hit hard on the

rupee.

Strengthening of Dollar In the last six months the dollar has strengthened by 3.52 percent with

the strengthening of the US economy. The dollar has been rising on signs of growing economic

momentum and talk of an early end to the Feds stimulus effort. This is something which is

beyond the control of the Indian Government and it is hampering the recovery of the rupee.

Insufficient inflow of FDIs and outflow of the foreign investments The downfall in the Indian

economy has worsened the situation and the government is unable to generate heavy capital

inflows. Despite all the government effort to allow Foreign Direct Investment (FDI), there hasnt

been significant FDI inflow. The US federation has withdrawn some of its bond buying

programmes resulting in a sudden outflow of money that in return has left India far behind in the

race .Foreign investors has been pulling out of the Indian economy. The month of May has seen

a record outflow of foreign investments of Rs. 44162 crore. With the giants like Posco pulling

out of its Rs. 30000 crore steel plant project in Karnataka followed by ArcelorMittal pulling out

of its Rs. 50,000 crore project in Odisha due to delays and land acquisition delays. This has

shrunk the total inflow of capital in India. Indian investors have been spending more abroad than

foreign investors have been spending in India. This has led to the further deficit of current

account.


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Rising Imports

The rising import bill is one of major concern and is has hindered the government effort to tackle

the falling rupee. Oil accounts for 35% of the total imports and gold 11% on Indias current bill.

There has been a heavy demand for the greenback from the exporters of oil, the most prolific

buyers of dollar in the world market, thus pushing rupee lower. In the gulf countries, the dealingof oil is done in dollars, i.e, if India has to purchase oil, it has to pay in dollars, so for this India

needs purchase dollars from USA in exchange of gold. This has led to the further devaluation of

the rupee. Also, the sliding prices of gold have triggered the government to lower the imports of

gold, thereby increasing the Current Account Deficit (CAD) and concurrently weighing heavy on

the currency.

Poor Economic Growth

The Gross Domestic Product (GDP) has hit its lowest patch in the last 10 years. With fall of the

GDP to 4.8%, it had significant effect on the stock markets and the falling rupee. Themanufacturing, mining and the agricultural sector has faltered and investors have become

cautious of investing in India.

The central government has unravelled a multipronged strategy to bring about an increment in

the inflow of dollars and limit the outflow to compensate for the sliding value of rupee. A

planned increase in import duty has been exercised to shore up the decrement in rupee. Some of

the other possible remedies that can be emphasized are:

The customs duty on several red-hot imports like gold and silver is on the rise as its a

strategic movement by the central government to ease the gap between dollar and rupee.

NRI bank deposits can be made more attractive and foreign loan norms eased.

The government has also decided on three public sector institutions based on finances to

raise funds in dollars through bonds.

Electronic goods top the list when it comes to making big business. In order to stabilize

rupee a significant increase in customs duty on Electronic goods needs to be exercised.

Another point that can be kept on the anvil is that some imports should be denied. The

products can include crude palm oil, copper and certain varieties of coal.

Economists believe that these measures will bridge the foreign exchange (forex) gap by $1.8

billion. Even finance minister P.Chidambaram anticipates that the government will be able to

prune annual imports by $7 billion and thereby increasing inflows by $11billion. This would in

return help maintain the Current Account Deficit (CAD) at $70 billion which roughly estimates

to 3.7 % of the gross domestic product. This calculated statistic with these measures is lower

than that of last year that had estimated to $4.8 billion.


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There have been a slew of measures that have been undertaken by the government but to no

avail. It clearly shows its urgency to deflect a possible crisis on the left over payments. Way back

in 2001, as an aftermath of the 9/11 attacks and Dotcom bust, State Bank of India (SBI) managed

to mint $5 billion through Indian Millennium Deposits. This time State Bank of India refuses to

play a role in decrementing dollar debt. A quasi-sovereign has been signed by the government

and other financial institutions like Power Finance Corporation and Indian Infrastructure Finance

Corporation Ltd.

Taking a closer look at these issues, the fall in rupee can be attributed primarily to 3 broad

factors.

Firstly, the grim global economic outlook, essentially due to the European debt crisis.

Due to turbulence in European markets, investors are considering dollars as a safe haven

for their investments in the longer run. This led to an increased demand for dollars vis--

vis the supply for rupee and thus the depreciation. Another line of thought could be that

while investors are shifting from European markets, why are they not investing in theIndian markets? The Indian economic scenario for the entire 2011 has been plagued by

high rate of inflation, hovering above 8%, and extremely low growth in manufacturing

sector. The HSBC-PMI (Purchasing Managers index) fell to 51 in the month of

December 2011. The cumulative effect of these factors is leading to a shift in investor

sentiments towards dollar market.

Secondly, the fall in rupee can be largely attributed to the speculations prevailing in the

markets. Due to a sharp increase in the dollar rates, importers suddenly started gasping

for dollars in order to hedge their position, which led to an increased demand for dollars.

On the other hand exporters kept on holding their dollar reserves, speculating that therupee will fall further in future. This interplay between the two forces further fuelled the

demand for dollars while sequestering its supply from the market. This further led to the

fall in rupee.

Lastly, there has been shift of FIIs (Foreign institutional investors) from the Indian

markets during the current financial year 2011. FIIs leads to a high inflow of dollars into

the Indian market. As per a recent report, the share of Indias FII in the developing

markets has decreased considerably from 19.2 % in 2010 to 3.8% in the year 2011. As

FIIs are taking their investments out of the Indian markets, it has led to an increased

demand for dollars, further leading to a spiraling rupee.

Encompassing all these factors, there is a lack of firm initiative by government on issues

such as allowing FDI in retail. Recent debacles such as 2G have further rendered the Indian

market unattractive to a certain extent.


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Effects Of Falling rupee

The first major impact of the falling rupee can be seen on the rising import bill. India imports

close to 70% of its net fuel requirements. This means the companies importing oil have to shell

out more rupees for the same dollar invoices. As is clear from Fig.1 although the price of oil has

gone down from $118 per barrel to $109 per barrel, not much benefit can be derived since

exchange rate too shoot up from Rs. 44 to Rs. 52.7 a dollar.. Instead, the price of importing oil

increased to an extend of RS 489 (as is clear from Fig2 (b)). This has severely impacted the

bottom line of these companies as well as the subsidy bill of the Indian government. Huge

buying of dollars from the market in order to meet the import bill has further added to the

existing woes. Additionally, the falling rupee has added further to the inflationary pressures, as

imports have become costlier and thus increasing the prices of key commodities such as oil,

imported coal, minerals, and metals. However the falling rupee has substantially appreciated the

revenues for the exporters, who receive more rupees for their dollar receipts. These industriesinclude the IT Services industry, textiles and other export oriented industries. Increasing

imbalance in trade i.e. increasing imports over exports is bound to have severe impact on

countrys fiscal deficit, which is pegged to increase by .8 percentages to 5.4% of GDP from the

originally estimated value of 4.6% of GDP.

Some other effects are as follows :

Trade deficit will widen because of costlier imports, worsening the current

account deficit.

Fuel price will keep petroleum subsidy in check, but fertilizer subsidy will rise.

Spending on any kind of foreign exchange denominated spending will increase.

Capital inflow will slow or reverse.

Spending on discretionary goods will increase.

Forex reserves could fall putting pressure on rupee.

In case of weak demand companies may not be able to pass on higher inputs

costs.

The government and the RBI have issued a series of measures in recent days

designed to reduce the current account deficit and bolster the rupee, including

increases in the import duty on gold, the end of duty exemptions for flat screen

televisions brought in by airline passengers and restrictions on outward directinvestment by Indian companies and individuals.

Exports are unable to leverage the weak rupee fast enough given the speed of its

descent. In fact many exporters are caught out because of fixed price contracts

in rupees wherein they cannot get the benefits of its rapid fall. The balance of

payments is tilting sharply against us.

The Indian stock- market will take a hiding as opposed to a beating.


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Global rating agencies will revise our rating downwards to Junk status, making

international borrowing difficult and even more expensive.

If the automated devaluation brought on by the rupee makes some asset classes

attractive, there may be slight recovery because of arbitrage opportunities and

bottom-fishing.

The Finance Ministry has argued that this sharp decline in the rupee is no reason to panic. Its

representatives have suggested that this is happening because most currencies have depreciated

relative to the U.S. dollar ever since Ben Bernanke, the head of the United States Federal

Reserve, indicated a possible decline in the monetarypolicy of quantitative easing that had

encouraged capital to move away from the U.S. in search of higher returns in other currency

assets. But this is simply not true. First of all, the rupee had declined even when the U.S.

monetary policy was at its most lax and when countries such as Brazil had complained about the

currency wars generated by the U.S. quantitative easing.

Further, recent trends indicate a significant worsening of both trade and current accounts. Both

exports and imports actually declined in 2012-13 compared with the previous year, but even so

the trade deficit still increased by nearly 4 per cent, or more than $7 billion. In April 2013,

exports were 2 per cent higher than in April 2012but imports were 11 per cent higher and non-

oil imports were 15 per cent more. So the trade deficit increased by more than 26 per cent in

April 2013 compared with the previous year (Finance Ministry, Monthly Economic Report for

April 2013).

There are several ways in which the falling rupee immediately has an inflationary impact, one ofthe most important of which is the price of energy. Since the misguided decontrol of oil prices, it

is not only the globally traded price of fuel but also the exchange rate that determines domestic

oil prices.

What is more, the increasing costs of imports can also affect exports, thereby wiping out any

global cost advantage accruing from the devaluation. For example, important export sectors such

as gems and jewellery, automobiles, machinery and chemicals are all very import-dependent, and

their rising costs could nullify the impact of the devaluation on their ability to sell more cheaply

in export markets. This is made worse by the fact that in the current depressed global trade

context, buyers are able to renegotiate contracts once the exchange rate has changed. Indeed,many global buyers even in sectors such as garments and leather goods now insist on contracts

and invoicing in rupee terms.

This allows them to benefit completely from rupee depreciation, while the local producers are

forced to bear the rising domestic costs. This means that the falling rupee need not generate any

significant increase in exports as may be hoped.


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Effect on the Common man

Whether the currency would find its stable level or will continue to slide further remains a tricky

question. But till the currency settles itself, lets have a look at how continuous depreciation of

the Indian currency will affect the common man.

Importers/Exporters

Importers will strongly feel the pinch of falling rupee as they will be forced to pay more rupees

on importing products. Conversely, a feeble rupee will bring delight to the exporters as goods

exported abroad will fetch dollars which in return will translate into more rupees. Also, a weak

rupee will make Indian produce more competitive in global markets which will be fruitful for

India's exports.

Imported goods:

Buying imported stuff will become a very costly affair. You will have to shell out extra on

imported goods. For instance if you bought a product valued USD 1, you paid around Rs 54

(months ago) but you will now have to shell out close to Rs 68 for the same product.

Fuel price:

A weak rupee will increase the burden of Oil Marketing Companies (OMCs) and this will surely

be passed on to the consumers as the companies are allowed to do so following deregulation of

petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a

substantial increase in overall cost of transportation which will stoke up inflation.

RBIs monetary policy:

If the depreciation in rupee continues, it will further increase inflation. In such a situation RBI

will have very less room to cut policy rates. No cut in policy rate will add to the borrowers woes

who are eagerly waiting to get rid of the high loan regime.

Tourism:

The depreciating rupee will surely be a dampener if you are planning your holiday abroad. Your

travel charges as well as hotel charges will escalate drastically, let alone shopping and other

miscellaneous spending activity.


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Overseas Indians:

Money saved is money earned. Depreciation of rupee is certainly a good news for the overseas

Indians. Those working abroad can gain more on remitting money to their homeland.

Countrys fiscal health:

A frail rupee will add fuel to the rising import bill of the country and thereby increasing its

current account deficit (CAD). A widening CAD is bound to pose a threat to the growth of

overall economy.

Jobs And Remuneration:

Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which

is dependent on imports will have to face an increase in cost of production and operations.

"In order to nullify the increase, these companies will have to rationalise costs within theircontrol. One of this will be human resources. So, either lesser number of people will be hired or

the salary bill will be kept constant or reduced," says Rituparna Chakraborty, co-founder and

senior vice president, Team Lease Services. However, it is a good time for industries which earn

in dollars. "The information technology sector stands to gain, but global recessionary conditions

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.

Therefore, more or less all auto companies will have to increase prices. "We expect at least a

further 2% increase in prices. Maruti has already revised prices twice in last two months. Others

like Hyundai, Honda and Ford that have large import content in their cars will have to soon

increase prices to protect margins," says Deepak Jain, assistant VP and research analyst, Share

khan Institutional Research.

Entertainment:

The imported paperback, your favourite pizza and the latest laptop will also become moreexpensive. "There is an increase in the cost of imported books as well as the cost of sourcing

them. In most cases we are trying to absorb the increased cost, but there may be scenarios where

the end-user will get impacted," says Ankit Nagori, VP, categories, Flipkart.com.

Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported

components will also become costlier. International food chains which run outlets in India are

not denying the impact on profitability.


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"The depreciating rupee has had a significant impact on our capital expenditure as we import a

lot of special kitchen equipment. There has been an indirect impact too as a small part of inputs

are imported by our suppliers. If the trend continues, we will be forced to pass on some burden to

customers," says Vikram Bakshi, managing director and JV Partner, McDonald's India (North &

East).may set off the impact," says Chakraborty.

Foreign education:

For Abin Biswas (21), a B.Tech in biotechnology, an opportunity to work as a trainee intern in a

Harvard-MIT joint venture project was a dream come true and a proud moment for his parents.

The cost was high but Dr Anup Biswas, Abin's father, decided to bear the expenses.

"The institute is providing him just a daily travel allowance. So, nearly all expenses have to be

borne by us. Though the amount was huge for us, we agreed to send him as the platform he wasgetting was big as well," says Rinijhini Biswas, Abin's mother.

With the rupee weakening, the burden has increased. The rent ($378) of a room he shares with

friends was Rs 17,000 (at Rs 45/$) in mid-August 2011 when he went. Now, it is Rs 19,500 (Rs

51.52/$). A meal ($6) which cost him Rs 270 then now costs Rs 300. This means an additional

food expense of Rs 1,800 per month.

"Abin's monthly budget, roughly $1,000, has risen from Rs 45,000 to Rs 53,000, the last

installment we paid. It will be difficult for us to bear his expenses if the trend continues," says

Rinijhini Biswas.

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. For $100,000, a student had to pay Rs 45 lakh. Now, he has to

shell out Rs 52-54 lakh, depending upon the exchange rate.

"The cost is in a foreign currency while the borrowing is in rupees. So, the students may fall

short of funds as the loan would have been taken according to the initial requirements. In such a

scenario, either the student's personal contribution will have to increase or he will have to ask thebank to increase the loan amount," says Ashutosh Khajuria, president, treasury, Federal Bank.


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Measures to stabilize rupee

Government has taken a number of steps to stem the depreciation of Indian rupee including

moderation in demand of non-essential imports and enhancing supply of capital flows, Finance

Minister P Chidambaram said.

"A number of steps have been taken to moderate demand of non-essential imports on April 12,

2013, enhance capital flows to augment supply of foreign exchange and curb speculation in the

foreign exchange market to stem the rupee depreciation," Chidambaram said in a written reply to

Lok Sabha on Tuesday.

He said fall in value of rupee in the recent period is due to supply-demand imbalance in domestic

foreign exchange market on account of elevated levels of current account deficit (CAD) and

volatility in capital flows, particularly FII inflows.

Indian rupee breached the 64-mark against dollar intra-day by falling 98 paise to trade at record

low of 64.11 on Tuesday on the back of strong dollar demand.

Chidambaram said the impact of rupee depreciation on domestic consumers is mitigated to a

large extent on the back of substantial subsidy outgo on imported items such as diesel, LPG,

kerosene, fertiliser.

Also, headline inflation based on wholesale price index (WPI) has been at moderate levels in

recent months at 4.86 per cent in June, he added.

In reply to a question on economy, he said several steps have been taken to revive economic

growth including speeding up of infrastructure projects, enhancement of credit to infrastructurecompanies and strengthening of financial and banking sectors.

Besides, liberalized FDI norms in several sectors including telecom, deregulation of sugar sector,

launch of inflation indexed bonds, fiscal consolidation through reforms and reduction in subsidy

of diesel, cap on the number of subsidized LPG cylinders and new gas pricing guidelines are

other measures, he said.

In reply to a separate question, Minister of State for Finance Namo Narain Meena said a number

of measures have been taken to contain the CAD to reduce the volatility in the currency market

and to stabilize the rupee.

These include compression in import of gold and silver and non-essential items, allowing public

sector financial institutions to raise quasi-sovereign bonds to finance long term infrastructure,

liberalising ECB guidelines, permitting PSU, oil companies to raise additional funds through

ECBs and trade finance and liberalising NRE/FCNR deposit schemes. Meena said.


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Top 10 steps taken to support the currency

1. The Reserve Bank of India (RBI) will provide dollars directly to state oil companies in

attempt to support the rupee that has slumped over 20 percent this year. State-run

companies are the biggest source of dollar demand in markets - worth $400 million to

$500 million daily - and directing them to a special window is meant to reduce pressure

on the rupee.

2. The government will soon issue quasi-sovereign bonds to help bring more dollar inflows

into the country. Under the scheme, state finance companies will sell these bonds to fund

infrastructure development.

3.

The RBI will sell Rs. 22,000 crore bonds every week to check the volatility in forex

market.

4. The government has hiked the import duty on gold and silver to 10 percent to rein in the

imports. The RBI has tightened the norms for gold imports by linking them to exports. Also,

credit availability for gold imports has also been tightened.

5. The RBI has reduced the amount of dollar resident Indians can take out of the country

from $2,00,000 to $75,000 in a financial year. Indian companies have to seek RBI's

permission if they want to invest any amount beyond their net worth abroad. Earlier, a

company could invest as much as four times its net worth in an overseas venture.

6.

PSU oil companies would be allowed to raise additional funds - $4 billion - throughexternal commercial borrowings (ECBs).

7.

In a bid to attract NRI deposits, the RBI liberalised bank deposit schemes and some banks

raised rates for overseas Indians this month.

8. To spur banks to attract more dollar deposits from NRIs, the RBI has exempted these

deposits from cash reserve ratio and statutory liquidity ratio requirements.

9. The RBI has tightened liquidity to reduce the availability of rupee in the banking system

to reduce rupee volatility. However, these measures have led to an increase in the short-

term interest rates.

10.The government has banned the duty-free import of flat-screen televisions to stem the

flow of foreign currency out of the country. It is estimated that more than 1 million

television sets were brought into the country last year. Under the new rules, airline

passengers will have to pay a 35 percent duty and other charges.


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Role of RBI

RBI has been extremely cautious in its intervention during the entire rupee depreciation crises.

RBI has however reacted with timely interventions by selling dollars intermittently to tame sharp

fall in the currency. The outflow of dollar reserves from RBI coffers has been extremely

cautious, mostly due to the dwindling foreign exchange reserves. The foreign exchange reserves

of India in December 2011 stood at 270 billion USD. Recently RBI has intervened with key

policy initiatives such as intervening in the forward contracts policy. As per new RBI policy the

cancelled forward contracts cannot be rebooked. Exporters in order to rake in more profits, were

booking forward contracts, then cancelling the contracts, and again rebooking at better rate. This

process led to a further depreciation in rupee and fuelled speculations. Also, RBI intermittently

put trading limits for the banks in the foreign exchange market in order to tame the speculative

forces.

Looking at the current economic outlook, the currency crises seems to stay for a much longer

period this time around. However, a structuring of Greek debt coupled with higher inflows from

FIIs can lead to an arrest in the falling rupee.

The Reserve Bank of India announced several steps to stop the slide in the Indian rupee

1. The RBI has increased the Marginal Standing Facility (rate at which banks

borrow from the RBI using their statutory liquidity ratio securities as collateral)

rate. So far, banks (bearish on the rupee) borrowed from call money markets and

bought dollars in the forward markets expecting the dollar to rise. Since,

borrowing short term money will now be costlier, banks will most likely cut theirforward positions and reduce speculative trading. This will reduce pressure on the

rupee.

2. The RBI has capped the amount banks can borrow from overnight markets

to Rs. 75,000 crore. The RBI will also conduct Open Market Sales of bonds

of Rs.12,000 crore on Thursday. These measures are aimed to suck liquidity from

the system. Bond prices will fall and yields will rise. Higher yields will attract

foreign investment back into the debt market at a time when FIIs have sold

billions of dollars ever since the U.S. Fed signalled a tapering of the quantitative

easing.

3. The new steps were announced after RBI's earlier steps to sell dollars in forex

markets through state-run banks failed to halt the slide in the currency. Moves

taken to curb speculative trading last week helped the rupee snap a nine-week

losing streak, but the currency slipped below the psychological 60 mark again on

Monday, necessitating more steps.


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4. The Indian rupee jumped over 1 per cent to 59.13 in early trades on RBI

measures. Sonal Varma of Nomura said the measures are "a classic textbook

response". These steps will tighten domestic liquidity, raise short-term interest

rates, increase the relative interest rate differential and possibly stem debt

outflows, Ms Varma wrote in a note.

5. As expected, bond yields jumped sharply, with yields on 7.16% 2012 bond edging

above the 8 per cent mark.

6. But stock markets fell, with the Sensex plunging 385 points in early trades fearing

there will be no rate cut later this month. Finance Minister P Chidambaram tried

to calm markets. He said RBI measures were aimed to quell speculation and

volatility in forex markets. "These measures should not be read as a prelude to a

policy rate changes," he added.

7. Analysts said the probability of a rate hike, if today's measures are not successful

in stemming rupee depreciation, has gone up. Nomura said there is a risk that

today's measures could backfire. "India's growth is already very weak and tighter

domestic liquidity will worsen the financial conditions for corporates and banks,

hurting asset quality and the growth outlook," the investment bank said.

8. There are fears that current moves may succeed in stemming debt outflows

(helping the rupee), but growth-sensitive equity flows will be at risk. So, stock

markets will fall further, with banking stocks at the highest risk. Barclays said if

the higher rates were to persist and impact GDP growth then that would impactthe entire banking system negatively. The Bank Nifty slumped over 4.5 per cent

lower, underperforming the broader Nifty.

9. This move will impact the banks and NBFCs in two ways. One, directly through

net interest margins (which will fall) and two, indirectly through the impact on

GDP growth, Barclays said. Yes Bank traded with over 8 per cent cut, while

IndusInd Bank shares shed 7 per cent.

10.These measures are unlikely to send the rupee in a permanent upward trajectory.

The government needs to address fundamental problems such as high current

account deficit, analysts said. Prime Minister Manmohan Singh will discuss a

proposal to increase Foreign Direct Investment (FDI) cap in sectors like telecom,

retail and defense later today. Liberalizing FDI rules will help attract foreign

investment into the country, which is badly needed at a time when the rupee is the

worst performing currency in Asia.


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Conclusion

To increase rupee value, India has to work upon the reasons which are mentioned above and has

to take right decision. As imports are exceeding exports, India should increase exports which will

lead to inflow of foreign currency. With this Country should also control the price of the

products then only demand can be increased. Increase in demand routes to rise in the exports by

mounting the buying capacity of the consumers.

At the same time focusing on FDI is important because FDI will increase the foreign currency

flow into the country. To increase the FDI first of all we should attract the foreign investors by

improving our economic condition which is interrelated with rupee value. It also needs to take

steps to improve investment environment and make India an attractive business destination for

both domestic and foreign investors to prevent excessive volatility and downward pressure on

the rupee. A better co-ordination with RBI is required rather than blame game. Apart from all the

political parties should come together in fixing the problem and getting back the investors

confidence


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Bibliography

Wikipedia

timesofindia.indiatimes.com Aug 15,2013

Bussinesstoday.intoday.in Pritam Hans, Feb 2012.

www.iitk.ac.in

Zeenews.india.com Aug 21, 2013.

falling value of rupee

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