Indian rupee: The volatile journey since independence

New Delhi: The Indian rupee, which was at par with the American currency at the time of independence in 1947, hit a record low of 64.02 against a dollar Thursday. This means the Indian currency has depreciated by more than 63 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 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, the rupee 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 FiveYear 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.

Related Stories Rupee drops below 100-level against Pound; hits new low Rupee remains 'key' for market recovery: BoFA Rupee could touch 70 Vs dollar in a month: Deutsche Rupee's downslide: How it will impact you The fallacy of 'dollar = rupee' in 1947 Rupee woes continue; hits fresh all-time low of 65.56 Vs dollar Few clues on timing of QE3 reduction in Fed minutes Indian Rupees slide: All is not bad - 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 63.30 against a dollar Monday, surpassing its previous record low of 62.03 hit on Aug 16.

Devaluation of rupee hits India-Bangladesh trade in Tripura

AGARTALA: Import of fish and other edibles from Bangladesh has remained suspended for over a month even as traders on the other side of the border are continuing to export goods through the Akhaura check post in Agartala. The India-Bangladesh Importers-Exporters Association has blamed devaluation of Indian currency and rise in the value of the US dollar for the suspension of trade between the two countries. Indian importers said that because of the devaluation ofthe rupee, they do not have the required demand to import items from Bangladesh as prices of the imported goods will be much higher in Tripura's market compared to normal prices. This has prevented the traders from importing goods from the neighbouring country. Habul Biswas, an official of India-Bangladesh Traders Association, said import of fish and other edible items from Bangladesh has been suspended since July 9 because of Ramzan. But even after Bangladesh lifted the suspension of exports on August 10, Indian traders have not yet resumed import of fish and edible items because of the devaluation of rupee. "The value of the US dollar, the only currency used in international trade in the area, has gone up to Rs 62. As a result, the prices of imported items have shot up. Besides, traders are still uncertain about the market demand," Biswas said. He said trade volume between India and Bangladesh has reduced to 15 per cent, and except for boulders, nothing has been imported from Bangladesh for over a month due to the escalating exchange rate of the US dollar. In fact, suspension of international trade at Akhaura for over a month has severely affected fish supply to the state and the resultant shortage has led to escalation of fish prices from Rs 300 to Rs 1,200 per kg in all city markets.

Tripura can only cater to the 40 per cent of the state's total fish requirement and the remaining 60 per cent comes to the state from West Bengal, Andhra Pradesh and Bangladesh, Biswas said. He added shortage of fish in the local markets has also led to escalation of vegetable prices.

Domestic factors responsible for rupee depreciation too: Chidambaram

Domestic factors, not just the global economic environment, are also responsible for the depreciation of the rupee, Finance Minister P Chidambaram accepted for the first time, in the Rajya Sabha today.

Speaking during Question Hour, replying to deputy leader of opposition Ravi Shankar Prasad Chidambaram said: decisions taken at home to counter impact of 2008 economic meltdown were among the reasons for depreciation of the Indian currency.

"I did say not only external but domestic factors. There are domestic factors. One of them is we allowed fiscal deficit to be breached because of certain decisions we took which brought us growth and stabilised economy; but we paid the price for it. We are taking steps to correct the fiscal deficit. We will not breach the new fiscal targets.

The current account deficit is a concern, we spent more dollars largely for essential commodities like oil. We are taking steps to contain the current account deficit," the Finance Minister said. We allowed current account deficit to swell because of certain decisions that we took during the period 2009 to 2011," he said.

This was the period when government announced stimulus to ward off impact of collapse of western economies.

Pranab Mukherjee was Finance Minister from 2008 to 2011.

"It brought us growth, it stabilised the economy, we staved off the very serious consequences of the 2008 collapse of the US economy. But it cost us in terms of fiscal deficit and current account deficit," Chidambaram said.

The government, he said, had steps to check fiscal deficit and is now on path of fiscal consolidation. The finance minister said the exchange rate was remarkably stable between August 2012 and May 2013 but rupee has come under pressure since May 22.

"All the currencies of all the emerging economies have come under pressure. For the moment we believe that the value of the rupee has overshot its true value," he said, while advising analysts to avoid speculating on the point where the rupee will settle in relation to the dollar.

"We have to be patient, we have to be firm, we have to be clear headed... in order to strengthen the fundamentals of the economy," he said. "I am confident that the rupee will find its true appropriate level."

"Once the investment cycle picks up, manufacturing picks up, I am sure it will have positive impact on the economy and in particular the current account deficit," he said.

Falling rupee: Causes and perks

Faaria Tasin

THE story of the free falling Indian rupee has surely caught our eye. Many on the other side of the border are concerned about the adverse effects this will have on the Indian economy, but should we be worried at all? There are quite a few reasons for the depreciation of the rupee against the US dollar, a few of which will be discussed. According to the elementary law of economics, if the demand for US dollars in India exceeds its supply, then the dollars worth will go up and that of the Indian rupee will come down in that respect. The outlook of the US economy is better and is anticipating a good degree of growth, and the Federal Reserve has hinted that it may end its fiscal stimulus implying that the dollar supply will decrease. In the short term this can lead to the dollar becoming stronger than other currencies, including the Indian rupee. Crude oil is quoted and purchased in dollars. When the price of crude oil rises, more dollars are

demanded which appreciates the dollar against the rupee, leading the rupee to lose its value. The volatility of the equity market in India may urge many foreign institutional investors to take money, i.e. US dollars, out of the country, leading to a fall in dollar supply. This can again lead to a fall in the value of the Indian rupee against the US dollar. Now, depreciation of a currency can also have its perks. Indians exports can rise. However, this may not be possible in the face of inflation in the Indian economy. Inflation will increase the price of raw materials and diminish the competitive gains from depreciation. Similarly, we can also think that Made in India products can now flood the Bangladesh market since the cost of rupee in terms of taka has fallen. However, if inflation rises, we cannot really reap the benefits of the falling rupee. Bangladeshi exports to India can move either way; exports can decline as India may buy less of Bangladeshi products since importing is more expensive now. Inflation in both countries should also be taken into account. Bangladeshs exports to India can also rise; if inflation rate is high in India, then Bangladeshi products can be relatively cheaper and it can still pay off to import from Bangladesh. If inflation rate is close in both countries then Bangladesh is likely to take advantage of the falling rupee and import more from India, at least in the short-run.

Economy of India: What is the reason behind recent Rupee depreciation in August 2013?
Why Rupee is going down? I will try my best to explain in layman's terms, though many aspects may not be that perfect. Yet I am just trying here. Its all over the news. Indian Rupee hit the all-time low mark of 62 rupees against the US dollar today(16th August 2013) .

Rupee and its Value Depreciation

Currency is the lifeblood of a nations economy. Where currency is affected, the economy is affected. And where the economy is affected, the currency experiences the repercussions. The Indian Rupee has experienced considerable depreciation of value in the recent times and

that has affected every aspect of the economy of India. In this post we would will try to examine what depreciation is, what is causing it and what are the effects. This post is divided into three sections which are hyperlinked below: 1. Rupee Depreciation 2. Causes 3. Effects

Rupee Depreciation :

We can simply say that depreciation of currency is the reduction of its value. How do we really say that the value has reduced or depreciated? The purchasing power of a unit of currency decreases. What used to cost Rs. 10/- at an earlier time now costs Rs. 100/-. This is a reduction in value of the rupee as such. We perceive this reduction as price-rise or inflation. There is another facet to this. If the exchange rate of the rupee with reference to another currency (say the GBP) increases for some reason, whenever we need to trade in GBP(), we need to shell out more INR for the same amount in GBP. In such situations, rupee is considered as depreciated in value with reference to the GBP. Exchange rate reflects the demand & supply of currency in which transaction takes place.

Thus, when the rupee exchange rate increases with reference to the USD($) then it has far reaching effects for the economy because :

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We do a lot of business in USD. The USD is the worlds reserve currency. This means all international transactions with any country will accept the USD as legal tender.

There are other equally important currencies like the Euro() or the JPY() which also have far reaching effects on the Indian Rupee. Both these facets of rupee depreciation are interconnected and interrelated. Whether the root cause of depreciation is inflation or increase in exchange rate, it does affect the other and ultimately will lead to a general price-rise felt by all of us. Top

Causes :

Since the currency is the backbone of the economy, anything that affects the economy affects the currency as well. Lets look at some of the causes of currency depreciation in the context of the rupee :

One straightforward cause is the comparative strengthening of the USD or the currency of any dominant economy with respect to the INR. This will immediately be perceived as a weakening of the rupee. India is a net importer to the world. As a nation we import many goods and commodities to meet the needs of domestic consumption thus leading to high expenditure but our exports do not balance the imports. So equal amount of money does not

come into the economy. This devalues the rupee. At this point it is correct to point out that factors responsible for high Current Account Deficit (CAD) are also responsible for currency depreciation. Readers can refer CAD - How it affects Indias Economy for further reading on the topic. Being an emerging economy, India attracts foreign investments. Due to the current difficult economic situation, if the foreign investors (FIIs) feel that investment options are more attractive elsewhere, there will be outflow of capital from the economy as FIIs exit their investments in India leading to more dollar demand and depreciation of rupee. If currency appreciated due to the inflow of FII investments, then the opposite will also occur when the outflow of capital takes place. Foreign reserve depletion as demand for dollar increases. Top

Effects :

Below is a list of some of the most important effects of rupee depreciation which is by no means exhaustive but only indicative:

Increase in the cost of raw materials that the country imports. This increases input costs of finished goods manufactured in the country which leads to increase in finished products prices. Retail inflation increases. Purchasing power decreases. High domestic inflation depreciates the inherent value of rupee and reduces the purchasing/spending power. This coupled with a situation of high demand and low supply and lower domestic saving as a percentage to GDP leads to tighter monetary policy to dampen rupee demand. This has an effect of slow economic growth.

Cost of borrowing in the international market increases. Return on foreign currency decreases. Investment climate deteriorates. Fiscal deficit increases. You can read more in our post on Fiscal Deficit - Ringside View to India's Economic Problems. Govt. spending on subsidies increases. If the situation continues, subsidies may eventually become unviable due to high cost. Energy prices increase as we import majority of oil and gas to meet our consumption demands. CAD widens.. We become a cheap and attractive destination for international consumers because we can export at competitive price. Export-oriented industries and sectors like IT and Pharma will have a favourable climate.

Currency dynamics are very complicated as it affects and is affected by everything that happens in the domestic and international economies. What we have presented here is a simplified pared down version of a complicated and deeply interconnected economic subject. There is lot more to it than meets the eye and we hope that after reading this post, our readers will be in a better position to correlate things and make sense of all the buzz about rupee dynamics. The Govt. and the Reserve Bank of India (RBI) can take various steps to control the value of rupee. To know more about the RBI and its role in regulating the financial system view our post on RBI and its Monetary Policy.

Fall of Rupee: Causes, impact and the role of RBI

Wed, Feb 1, 2012 In Focus The fall of rupee vs. Dollar has created the same conundrum what the rupee appreciation caused in year 2007. However, the impact has reversed this time with exporters making appreciated revenues and the importers feeling the heat. The increased demand for dollars vis--vis the India rupee has led to a sharp depreciation with rupee falling close to 18% from the Aug 2011 levels, and hitting an all time low of 54.32/USD on 15th December 2011, making it the worst performing Asian currency of the year. 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 the Indian 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 the rupee 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. Evaluating the impact of the falling rupee on the Indian economy 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 industries include 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.

Figure 1 oil prices and exchange rates Source RBI Role played by 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.