Veerangna singh, m.

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Introduction
Currency Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. Devaluation means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used to describe a decrease in a currency's value (relative to other major currency benchmarks) due to market forces, not government or central bank policy actions. Under the second system central banks maintain the rates up or down by buying or selling foreign currency, usually but not always USD. The opposite of devaluation is called revaluation. Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation. Devaluation in Indian rupee since independence 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 two years. This volatility became acute in 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 markers 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, the rupee continues to depreciate. And the trend is unlikely to reverse any time soon. "We expect the rupee to depreciate further. It may touch 63 against a dollar in near-term (in a couple of months)," Reena Rohit, chief manager, non-agri commodities and currencies at Angel Broking, told IANS. She said rupee depreciation was badly hurting Indian economy. It was fuelling inflation and has hurt economic growth. 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.

Veerangna singh, m.com, 122532 - 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 choose 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. - 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 situation, 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. "India being a developing economy with high inflation, depreciation of the currency is quite natural," said Siddharth Shankar, an economic expert and advisor at brokerage firm KASSA. Shankar said the sharp depreciation as witnessed this year was hurting the economy. "Depreciation of rupee is good, so long as it is not volatile. A random depreciation that we have seen in the last few months is bad and it has hurt the economy," he said. The Indian currency hit a record low of 61.80 against a dollar Aug 6. It closed at 61.28 Wednesday.

Veerangna singh, m.com, 122532

Reasons for Devaluation in Indian rupee

The rupee has plunged by around 2% in just a week. Ironically, during the same period, markets saw inflows of up to $2.4 billion. This brings us to the riddle what is driving the rupee lower to nearly its 8 1/2-month low? Also, going forward, it appears that the losses will extend. In the absence of any major news from the domestic markets, international forces will likely drive the path of the rupee. Here are the five major reasons behind the rupee's weakness: Dollar On A Horse Ride The main reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched its three-year high level of 84.30. The record setting performance of US equities and the improvement in the labor market has made Americans more optimistic about the outlook for the US economy, thereby spurring greater hopes of QE tapering. The US dollar is looking like gold these days because the Federal Reserve is in a very different position versus the ECB, BoJ and the RBA. The Federal Reserve is talking about tapering asset purchases at a time when European officials are considering more aggressive monetary easing measures such as negative deposit rates. The fact that the Euro zone is in a recession is just another reason why investors are snapping up dollars. The monetary policies of the ECB and the BoJ pose a threat to the value of the EUR and JPY whereas the next move by the Fed should support the dollar. This divergence is bringing the dollar more into the limelight as a 'safe haven'. Capital preservation is just as important as capital appreciation in the present times and for this reason the direction of the monetary policy and the consequent implications for the currency has become very important. Recession in the Euro Zone Is Back On the Table The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was seen holding the key level of 1.30, has dropped lower to 1.28 levels on the back of deterioration in the local economic data. For the past month, investors have been selling Euros and buying dollars on the premise that the Euro zone is in a recession; and the ECB is considering more stimulus at a time when the Fed is considering less. If the data shows a deeper contraction in Europe and Mr. Draghi reminds investors that the Central bank is watching the economic data carefully to see if additional action is necessary, the EUR/USD could extend its losses. Owing to the uncertainty prevailing in Europe and the slump in the international markets, investors prefer to stay away from risky investments. The credit rating agency's downgrade of India to BBB- with a negative outlook the last of the investment grade has not helped its cause. Any outward flow of currency or a decrease in investments

Veerangna singh, m.com, 122532 will put a downward pressure on the rupee exchange rate. This global uncertainty has adversely impacted the domestic factors and could lead to a further depreciation of the rupee. Bleak Fundamental Outlook The country with high exports will be happier with a depreciating currency; the same does not apply for India. India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil, which constitutes a major portion of its import basket. The fall of the oil price to US$90/barrel has helped India to fight the depreciating rupee up to some extent but at the same time the Euro zone, one of India's major trading partners is under a severe economic crisis. This has significantly impacted Indian exports because of reduced demand. Thus India continues to record a current account deficit of around 4.3%, depleting its Forex reserves in the bargain and thus depreciating the rupee. From time to time, the macro-economic policy has to accord greater emphasis to one segment or the other. At the present time the worry lines are multiple high consumer price inflation, a large fiscal deficit, poor growth, flat industrial production and a balance of payments current account deficit. No Balance at Balance Of Payments The Government of India was relaxed with respect to the CAD issue as there was a sharp fall in the commodity prices (of gold and crude oil). A large part of the import bill is driven by other resources as well. The facts show that fertilizer imports surged by 30% in the last two years and coal imports have doubled. Therefore, the problem of CAD continues to persist. The Indian economy needs to debug its structural reforms and the gap between the imports and exports. With the reduction in exports and an increase in imports, on one side the current account deficit has increased while on the other, the fiscal deficit is also expected to be above the comfort levels due to increased subsidy. A slowdown in the global economy has adversely reduced the demand for Indian goods. The falling commodity prices on the other hand have increased imports resulting in an imbalance between payments and receipts. Technically Speaking We note a recent interesting inverse 'Head & Shoulder' pattern on the USDINR chart where the prices are close to the neckline of 55.40 and were seen facing resistance. In case this pattern holds true and the prices break above 55.40 on a consistent note (say for two weeks), then we might see a wild move in the Indian rupee going forward and we can easily target 57-58 levels. Even psychologically, the levels of 55 are seen as important. The breakout above these levels has triggered stop losses making the investors cover their long positions resulting in further increasing the demand for the dollar.

Veerangna singh, m.com, 122532

Effects of Devaluation in Indian Currency

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 (weeks ago) but you will now have to shell out close to Rs 61 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. Students studying abroad: Students who are studying abroad will bear the brunt most owing to depreciating rupee. Expenses incurred towards the university/college fee as well as that of living will shoot up, thereby spelling a huge burden on the students. 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. 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.

Veerangna singh, m.com, 122532

Suggestive Measures
In a major attack to clamp the further decline in the Indian rupee against the US dollar, the Reserve Bank of India (RBI) issued a series of liquidity measures. Bonds yields are now expected to go up while a dearer rupee is likely to create a squeeze in funds availability. Consequently, the demand for rupee will rise. "The market perception of a likely tapering of US quantitative easing has triggered outflows of portfolio investment, particularly from the debt segment. Consequently, the rupee has depreciated markedly in the last six weeks. Countries with large current account deficits, such as India, have been particularly affected despite their relatively promising economic fundamentals," RBI said in release underscoring the need for immediate measures to restore stability to the foreign exchange market. Measure One: The central bank restricted banks' borrowing through liquidity adjustment facility (or a window to borrow funds from RBI called LAF) to the tune of 1 percent of total deposits or Rs 75,000 crore. It will be effective from July 17 when onwards, banks have to look for other options to meet their overnight fund requirements if the level reach the stipulated mark. LAF is the combination of two auction routes: repo and reverse repo. While banks borrow from repo currently at 7.25 percent, they park their excess liquidity via reverse repo rate at 6.25 percent. Measure Two: Accordingly, RBI raised the interest rate of Marginal Standing Facility (MSF) by 100 bps to 10.25 percent as against 9.25 percent currently. Hence, the difference between repo rate and MSF stands at 300 basis points compared with 200 bps currently. Banks can borrow money pledging their excess SLR (Statutory Liquidity Ratio) bonds. Most of the banks are holding excess SLR above 23 percent. Hence, lenders can borrow money using MSF route Impact "The central bank opted for the latter. Bond yields may go up to 7.80 percent. The impact will be much severe than direct rate hike when LAF is restricted at 75,000 crore when excess SLR is at 4-5 trillion. The rate differential between repo and call market may now widen up to 30-40 bps compared with 5-10 bps currently. Banks would use MSF option to raise short term funds when the call money market rate will rise above 10 percent," he said. As of now, the benchmark call money market rate is hovering around 7.35 percent. The 10-yr (2023) bond yield is moving around 7.50-7.60 percent range. The relation between bond yields and prices is inverse. Banks' net borrowings come in the range of Rs 80,000 crore to Rs 1 lakh crore. In MSF market, banks need to pledge SLR bonds to mop

Veerangna singh, m.com, 122532 up funds. Banks are mandated to invest in government securities to the tune of 23 percent of their total deposits. Measure Three & need: Perhaps realising the impact on the bond market, the RBI announced an open market (sales) operation (OMO) of Rs 12,000 crore on July 18, 2013. This will ensure more flows of government papers in the market especially when bond prices are likely to fall due to rise in yields. "While the announcement of OMO is a good sign, I am yet to be convinced about the merits of liquidity measures to check rupee's volatility. A straight 25 bps hike in the policy rate would have lured foreign institutional investors to invest in India and thereby, stemming rupee's free fall with fresh dollar inflows," Ashutosh Khahjuria, president - treasury, Federal Bank . With all these measures, the central bank will continue to closely monitor the markets, the liquidity situation and the macroeconomic developments. It will take such other measures as may be necessary, consistent with the growth-inflation dynamics and macroeconomic stability.

Veerangna singh, m.com, 122532 REFERENCES 1. http://articles.economictimes.indiatimes.com/2013-0524/news/39502312_1_rupee-us-dollar-eur-usd 2. http://theindianeconomist.com/rupee-depreciation-cause-and-effects/ 3. en.wikipedia.org/wiki/Devaluation 4. http://zeenews.india.com/business/news/finance/rupee-depreciation-how-will-itaffect-you_77821.html 5. http://www.moneycontrol.com/news/business/rbi-opens-new-attack-to-clamprupee-free-fall_918147.html