EFFECTS AND CAUSE FOR FALL IN RUPEE VALUE AND ITS IMPACT ON INDIAN ECONOMY

ASSIGNMENT SUBMITTED BY BHARATHI.S 12MBAA08 DURGA.S.K 12MBAB11

Money is the value assigned to a commodity, a piece of paper, a coin or electronic data (think online banking and credit cards). It can be of different types-commodity money, representative money, fiat money and commercial bank money. Gold coins, cocoa beans, cattle or anything that has a value of its own and is used as a medium of exchange is commodity money. The use of commodity money is similar to barter, except that the commodity used is widely accepted and can be easily handled. Representative money is token coins and notes that can be exchanged for a fixed amount of precious metals or other commodities. In contrast, fiat money's value is imposed by the government, which makes refusal of payments made in the notified legal tender, in the form of currency notes and coins, illegal. Instruments such as cheques, demand drafts and banker's drafts are commercial bank money. They exist as entries in ledgers of financial intermediaries and can be used to make payments for goods and services. The value of a currency depends on factors that affect the economy such as trade, inflation, employment, interest rates, growth rate and geopolitical conditions Reasons for fall in rupee value: The rupee was fairly stable around 54-55 to a dollar between August 2012 and May 2013, and fell sharply to around 69 in two months. Though the fall reflected a general depreciation of emerging-market currencies, it has sparked a debate on what the equilibrium value of the rupee is. Some commentaries arguing for further depreciation are based on the "inflation differential". While the nominal rupee should depreciate to maintain competitiveness if Indian inflation is higher than that of its trading partners, the need to depreciate is lower if Indian productivity growth is higher than that of its trading partners. Correcting for the effects of productivity, we find that the rupee is not significantly overvalued today. Competitiveness is only one of the factors determining the current account deficit (CAD). Things like a ban on iron ore output leading to lower exports and higher imports and rigidities in coal output explain much of the high CAD. So does the demand for gold. Now, if large imports like oil are relatively inelastic to depreciation and if there is a rising imported intermediate content of exports, then rupee depreciation is unlikely to squeeze the CAD. In that case, the exchange rate will be determined by financial market perceptions. Given that incorrect expectations may become self-fulfilling, relying on the market to get it right, or to not overshoot, may not be right. The real effective exchange rate (REER) - a weighted average of our currency relative to our trading partners' currencies, adjusted for inflation - is a common measure of the alignment of a currency to its true value.

Impact on economy As India's economic boom disintegrates and the country stumbles through multiple challenges, the fall of the rupee versus the US dollar - an astounding 20 per cent from the beginning of the year - has caused the most consternation. The impact can be severe - higher fuel costs, rising prices of goods, rising interest rates, higher import costs, rising inflation, etc.

Rupee fall causes new woes for telecom industry With handsets worth Rs. 36,000 crore being imported in India every year and even domestic companies buying components from abroad, the rupees fall is hitting both hard although last weeks recovery in the currency may be a relief. However, both imported and domestically-manufactured handsets have turned dearer in recent months, in some cases by as much as 15% if the US dollar trades at around `67 though it has recovered from that level. And with the rupee still down 21% against the US dollar since May 2 despite its recent recovery, prices are likely to increase even more. While imported handsets are expected to cost 15% more, domesticallymanufactured handsets are likely to be 6-7% more expensive. That means consumer budgets for telecom will be squeezed. Till now the industry had configured the depreciation of the rupee from 48 to 57, said Pankaj Mohindroo, national president, Indian Cellular Association (ICA). The current fall has caught everyone by surprise. We will see the real impact of the rupees fall in the next one month. Moreover, with a large part of their debt being in denominated dollars, operators are also likely to feel the pinch especially if the US Fed begins scaling back its monetary stimulus programme, leading to further decline in the rupees value. For now, however, the industry rules out any such impact. Different firms have different levels of foreign debt and hence the impact of rupees depreciation on them is different, said Rajan S Mathews, director-general, Cellular Operators Association of India, the lobby for GSM service providers. Incumbent operators have high foreign debt, while new operators have low foreign debt. Tariff is driven by competition. Bharti Airtel, Indias largest telecom service provider, has a foreign debt of about $10 billion (around Rs . 62,000 crore) , the highest in the industry. The company, however, said the rupees fall will not have much impact. Our global debt of about $10 billion is in various currencies and across 20 countries, a Airtel spokesperson said. Dollar-rupee movement impacts only the dollar-denominated debt taken in India, which is about $500 million. As far as debt in rupee terms is concerned, we have net cash against net debt currently on a consolidated basis in India. Reliance Communications has the second-highest debt in the industry. The firm had a debt of Rs. 38,000 crore as on June 30, 2013, and about 60% of it was in foreign exchange. Company executives, however, ruled out any impact of a falling rupee.

A spokesperson said RCom will face very little impact as its Reliance Globalcom business generates around Rs. 7,000 crore in revenues per year in hard currency. RComs foreign currency debt is low -cost debt of long-term maturity, which is much cheaper over the tenure of the debt compared to rupee debt, even after considering the impact of rupees fall, the spokesperson added. Credit quality of companies Global agency Moodys on Thursday said weak rupee and higher borrowing costs will impact credit quality of several Indian companies especially, IOC, Tata Steel and Tata power. Increased borrowing costs and the weak rupee will pressure the credit quality of rated Indian non financial companies, Moodys said in a report titled Higher borrowing costs, weak rupee will pressure Indian corporate credit metrics. It said interest rates in India will likely rise further amid measures by the RBI to tighten liquidity and bolster the rupee, which has fallen near historic lows against the dollar. Interest rates for foreign currency borrowings will also increase in light of the US Federal Reserves decision to taper its bond-buying programme, the report said. Furthermore, it said, depreciation of the Indian Rupee will lead to revaluation of debt issued in US dollars, which in turn could put pressure on some covenants. The agency highlighted that the 14 non-financial companies that it rates in India have combined debt of Rs. 2.2 lakh crore (USD 32 billion) which is maturing in the fiscal year ending March 2014. Out of this, over 50 per cent is denominated in foreign currency. Referring to IOC, Tata Steel and Tata Power Company, Moodys said these companies are highly leveraged over the next 12 months and face a steeper increase in interest costs. We believe they will be able to refinance their maturing debt, but possibly at higher credit spreads than on existing debt, it said. On ONGC, RIL, TCS and Gail, it said they operate with large cash balances, which provide a buffer to fund any shortfall in working capital requirements and support near-term refinancing needs, if required. The report also said that rated companies with debt denominated in foreign currencies will report an increase in total debt value as a result of the historically low rupee exchange rate. Impact on public: Strong demand of US currency from importers and banks, continuous capital outflows, widening current account deficit and dollar's strength against other currencies overseas amid expectation that the Federal Reserve will soon taper its bond-buying programme has put pressure on the rupee. 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. 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. Overseas Indians: Money saved is money earned. Depreciation of rupee is certainly 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.