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Introduction
Currency depreciation is the loss of value of a country's currency with respect to one
or more foreign reference currencies, typically in a floating exchange rate system in
which no official currency value is maintained. Currency appreciation in the same
context is an increase in the value of the currency.
In a floating exchange rate system, a currency's value goes up (or down) if the
demand for it goes up more (or less) than the supply does. In the short run this can
happen unpredictably for a variety of reasons, having to do with trade flows,
speculation, or other factors in the international capital market. For example, a surge
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Rupee Appreciation: Its Impact on Indian Economy
Although the effects can take time, changes in the exchange rate can have a big
impact on the economy and your own standard of living and purchasing power!
There is often debate over whether a country should have a high or low exchange
rate. These discussions often revolve around the current economic and political goals
at the time. Let's explore the effects of changes in the exchange rate and see how
economic variables, such as inflation, the trade balance, GDP and exports & imports,
are affected.
To review quickly, an exchange rate is the rate at which one country's currency can
be traded for another country's currency. For example, in the United States, the
dollar's strength is often judged in relation to other currencies, such as the Japanese
yen, the Swiss franc, and the euro. When a currency appreciates, it means it
increased in value relative to another currency; depreciates means it weakened or fell
in value relative to another currency.
When a dollar buys more than its equivalent in another currency, it's often labeled
strong. When it buys less than its equivalent, it's weak. For example the exchange
rate as of August 2014 for the American dollar vs. the Mexican peso is 13 to 1; a
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Rupee Appreciation: Its Impact on Indian Economy
strong exchange rate! As of that same date, the American dollar vs. the euro is 0.75
to 1; a weaker exchange rate.
Indian rupee was connected to British pound from 1950 to 1973. On 24th September
1975, the connection between Indian rupee and pound was broken down and rupee
ties to the pound sterling were disengaged.
A float exchange regime was established by India. Effective rate of rupee was placed
on a controlled, floating basis and linked to a “basket of currencies” with trading
partners of India. In 1993 Liberalized exchange rate system (LERMS) was replaced
by the unified exchange rate system and a system of market determined exchange
rate was adopted.
However, the RBI did not relinquish its power to intervene in the market to control
the Indian currency. In India a series of economic reforms including liberalization of
foreign capital inflows were initiated since the early nineties.
Foreign exchange market has emerged as the largest market in the world and the
breakdown of the Bretton Woods system in 1971 marked the beginning of floating
exchange rate regimes in several countries.
The focus was given to wide ranging reforms of widening and deepening the foreign
exchange market and liberalization of exchange control. The Forex rates are
determined by market forces and are based on demand & supply of these currencies.
If supply exceeds the demand, the value of the currency depreciates.
Indian rupee was connected to British pound from 1950 to 1973. On 24th September
1975, the connection between Indian rupee and pound was broken down andrupee
ties to the pound sterling were disengaged. A float exchange regime was
established by India. Effective rate of rupee was placed on a controlled, floating
basis and linked to a “basket of currencies” with trading partners of India. In
1993 Liberalized exchange rate system (LERMS) was replaced by the
unified exchange rate system and a system of market determined exchange rate
was adopted. However, the RBI did not relinquish its power to intervene in the
market to control the Indian currency. In India a series of economic reforms
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Rupee Appreciation: Its Impact on Indian Economy
When you use the term appreciation or depreciation, make sure you’re referring to
currencies that are traded in foreign exchange markets with no government
interventions. A country may unilaterally peg its currency for various reasons. In the
absence of such government interventions, the exchange rate or the relative price of
two currencies is determined mainly in foreign exchange markets through the buying
and selling of currencies by market participants.
If both currencies are traded in international foreign exchange markets, you can use
appreciation or depreciation to describe the changes in the exchange rate.
The table shows that the dollar–euro exchange rate increased in February and
August 2012 . Compared to the previous period, the changes in both months imply
that more dollars were needed to buy one euro. Therefore, the fourth column refers
to these months as depreciation in the dollar. In February and August 2012, there
was a 2.54 and 1.04 percent depreciation in the dollar from their respective previous
periods.
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Rupee Appreciation: Its Impact on Indian Economy
January 1.2910
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Rupee Appreciation: Its Impact on Indian Economy
Presently Rupee is under volatile trend, caused by sudden changes in demand and
supply forces in forex markets. In a very short span rupee has depreciated more than
20%.US Dollar (USD) to Indian Rupee (INR) exchange rate reached highest in its
lifetime 68.85 INR on 28 Aug 2013. A major international event which triggered the
steep fall of ₹ against US$ was the statement of Chairman of US Federal Reserve,
Mr. Ben Bernanke expressing tightening of Quantitative easing and restricting
supply of US $ 85 billion per month to boost US economy. International trade and
investment decisions have become very difficult due to volatile exchange rate
because volatility increases exchange rate risk. If the participants in international
trade are aware about exchange rate risks, they may prefer to switch to domestic
activities where profits are relatively less uncertain rather than continuing trading in
foreign markets.
India is not the only emerging nation experiencing a steep decline in its currency’s
value. Several emerging market nations are also experiencing sharp depreciation
over the prospect of imminent tapering of the US Federal Reserve’s policy of
quantitative easing (QE) program. The South African Rand and the Brazilian Real
touched four-year lows against the US $ in June 2013. Except the Chinese Yuan and
Bangladeshi Taka, most Asian currencies have witnessed sharp depreciation since
the beginning of 2013. Nevertheless, the Indian rupee has fared more poor than other
emerging nation currencies because of its twin deficits – current account and fiscal
deficits.
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Rupee Appreciation: Its Impact on Indian Economy
Indian economy
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Rupee Appreciation: Its Impact on Indian Economy
Research Methodology
The research methodology adopted for this project is based on the collection of
secondary data. The attempt is to study the impact of appreciation of rupee on the
economy. The various stages have been adopted to carry out the research drive are
as follows.
The study is on the secondary data from various Newspapers, The Hindu Business
Line, The Times of India & the Economic Times. Internet sources:-
• https://www.researchgate.net/publication/309488226_Impact_of_Rupee-
Dollar_Fluctuations_on_Indian_Economy
• https://www.economicshelp.org/blog/437/trade/effects-of-falling-exchange-
rates/
• http://www.ijaiem.org/Volume5Issue6/IJAIEM-2016-07-01-45.pdf
• http://irjbm.org/irjbm2013/February/Paper4.pdf
• http://www.ijsrp.org/research-paper-1013/ijsrp-p2272.pdf
• https://en.wikipedia.org/wiki/History_of_the_rupee
• http://vijaysvision.blogspot.in/2013/12/devaluation-depreciation-of-rupee-
its.html
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Rupee Appreciation: Its Impact on Indian Economy
Review of Literature
India presents a unique case for studying the impact of exchange rate movements.
Prior to the Balance of Payments crisis in 1991, Indian Rupee was pegged to
a basket of currencies dominated by the US Dollar. The external payment crisis of
1991 forced the Reserve Bank of India (RBI) to implement a set of market-oriented
financial sector reforms, and a paradigm shift from fixed to market-based exchange
rate regime in March 1993. Institution of Current Account convertibility in August
1994, gradual liberalization of the Capital Account along with other trade and
financial liberalization measures meant a rise in total turnover in the foreign
exchange market by more than 150% (from $73.2 bn in 1996 to $130 bn in 2002-
2003, and further to $1,100 bn in 2011-2012). A direct outcome of these changes has
been a rise in the volatility of Indian Rupee.
Against this backdrop, RBI’s exchange rate management policy has aimed
at maintaining orderly conditions in the foreign exchange market by eliminating
lumpy demand and supply and preventing speculative attacks, without setting a
specific exchange rate target. Towards this end, RBI has used a combination of tools
including sales and purchase of currency in both the spot and the forward segments
of the foreign exchange market, adjustment of domestic liquidity through the use
of Bank Rate, Cash Reserve Ratio (CRR), Repo rate etc., and monetary
sterilization through specialized instruments. An interesting feature of RBI’s
intervention during this period has been asymmetry during episodes of appreciation
and depreciation. RBI has been intervening actively in the foreign exchange market
during episodes of Rupee appreciation by purchasing foreign exchange, while
following a hands-off approach during episodes of Rupee depreciation.
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Rupee Appreciation: Its Impact on Indian Economy
Simon W.L.S. in his study found that both exchange rate and current account
balance have direct and positive relationship with inflation. Due, P., Sen, P
examined the interactions between the real exchange rate, level of capital flows,
volatility of flows, fiscal and monetary policy indicators and the current account
surplus for the Indian economy for the period 1993Q2 to 2004Q1. The
estimations indicate that the variables are co-integrated.
Harberger (2003) studied the impact of economic growth on real exchange rate.
He found that there is no systematic connection between economic growth and
real exchange rate. Husain et al. (2004) found in their study that little access to
international capital is available for the weaker and less developed countries, so
low rate of inflation and higher level of durability is associated with fixed
exchange rate regime in those countries. However, they found no robust
relationship between economic performance and exchange rate regime in the
developing economies. They also found that advanced economies may
experience durable and slightly higher level of growth rate without higher level
of inflation in flexible exchange rate regime.
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Rupee Appreciation: Its Impact on Indian Economy
The United Nations Conference on Trade and Development (UNCTAD) june 2013
pointed out that the foreign direct investment in India gone down by 29% to $26
billion in 2012. When dollars come into India through the foreign direct investment
(FDI) route they need to be exchanged for INR. Hence, dollars are being sold and
rupees are bought. This pushes up the demand for INR, when we increase the supply
of dollars, it helps rupee gain value against the dollar or at least hold stable. In 2012,
the FDI coming into India has fallen dramatically. The situation is likely to continue
in the near short term. The corruption scandals revealed in the 2G and the coal-gate
scam hasn’t improved India’s image abroad. In fact in the 2G scam telecom licenses
have been cancelled and the message that was sent to the foreign investors was that
India as a country can go back on policy decisions. This is something that no big
investor who is willing to put a lot of money at stake, likes to hear.
Opening up multi-brand retail sector was government’s other big plan for getting
FDI into the country. In September 2012, the government had allowed foreign
investors to invest upto 51% in multi-brand retail sector. But between then and now
not even a single global retail company has filed an application with the Foreign
Investment Promotion Board (FIPB), which scrutinizes FDI proposals.
This scenario doesn’t look like it is changing as still foreign investors struggle to
make sense of the regulations as they stand today. Dollars that come in through the
FDI route come in for the long run as they are used to set up new industries and
factories or to have joint venture in existing companies.
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Rupee Appreciation: Its Impact on Indian Economy
This paper mainly takes into account the Indian Rupee Crisis mainly during the last
quarter of 2011 & the impact it had on the Indian Economy then & now. The paper
first summarizes theoutlook of the Indian Economy, its economical & financial
history. It shows how the trend of theIndian rupee has been from 1991 to 2011 & the
main reasons behind the fluctuations in theIndian Rupee.After determining the
reasons behind the fluctuations it talks about the depreciation in theRupee against
the Dollar over the last financial year (2011-12). Basic reasons identified in thepaper
are:
Persistent Inflation
Persistent Fiscal Deficit
Lack of Reforms
Global Economic ScenarioAfter the reasons of the downfall are determined, policy
measures* have been identified inorder to control the depreciation of the Indian
Rupee. Moreover the role of RBI has also beenidentified as to what all measures can
be taken by them to curb the situation.
Chellasamy (2013) analyzed the effects on rupee depreciation against the dollar
covering the area of currency growth, foreign investment, and macro-economic
factors that affected Indian currency during the study period from 1989-1970 to
2012-2013.
Kotai (2013) studied that currency markets is the most volatile & liquid in all
financial market in the world. The paper analyzed the volatility behavior of select
five markets (INR/USD, JPY/USD, EURO/USD, GBP/USD, and CNY/USD) to find
out which currency market is most volatile & sensitive. The study found that Indian
currency market is more volatile and sensitive compared to other select countries
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Rupee Appreciation: Its Impact on Indian Economy
and results show that Indian currency market is more sensitive due to the external
factors.
Kaur & Sirohi (2013) studied the after-effects of rupee depreciation i.e., change in
pattern of spending and savings of people who are getting affected by rupee
depreciation; like people having to pay more for their foreign education, costlier
imports and slow consumption, upturn in unemployment rate because of reduction
in earnings of companies, costlier foreign travel, high inflation because of currency
depreciation, etc.
Mirchandani (2013) The study identifies the causes of depreciation of the Rupee
and analyzed different macroeconomic determinants that have an impact on the
volatility of exchange rate and their extent of correlation with the same. Study tries
to identify the various probable reasons associated with it, likelower capital inflows
and uncertainty over Indian economy.
Bhandari (2014) This paper relates to the causes & impact of rupee depreciation
against dollar on Indian economy in the recent period when on August 28th 2013,
the rupee closed to 68.80 against dollar resulting in the fear of Indian economy
returning to 1991 scenario.
Smriti (2013) The paper explored the dynamics, factors influencing and effects of
fluctuations in the exchange rate of Indian Rupee, exchange rates being the most
monitored, analyzed, and governmentally manipulated economic measure.
Sahoo, Satyananda (2012) Study analyzed volatility spillover effects from the
exchange rates of the Brazilian Real, the Russian Ruble, the South Korean Won, the
Singapore Dollar, the Japanese Yen, the Swiss Franc, the British Pound Sterling and
the Euro to the exchange rate of the Indian Rupee during 2005-11.
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Rupee Appreciation: Its Impact on Indian Economy
Dua & Sen (2006) Study examines the interactions between the variables namely
real exchange rate, level of capital flows, volatility of flows, fiscal and monetary
policy indicators, and the current account surplus for Indian economy for the period
1993 to 2004. The study finds that determinants of the real exchange rate, in
descending order of importance, include net capital inflows and their volatility
(jointly), government expenditure, current account surplus and the money supply.
Singh (2013) explained how Indian economy will enlarge loss and shrink its gain
with depreciation of rupee in long run and suggested that imports of unnecessary
items such as gold, needs to be restricted in India to improve the value of INR by
lowering the import bill.
Kanika Arora (2014) studied the real implications of the depreciation of the rupee on
the Indian economy and shows that in the long run, the Indian economy has more to
lose and less to gain with weaker rupee. The study concluded that the Indian Rupee
has depreciated significantly against the US Dollar marking a new risk for Indian
economy. Grim global economic outlook along with high inflation, widening current
account deficit and FII outflows have contributed to this fall. RBI has responded
with timely interventions by selling dollars intermittently. But in times of global
uncertainty, investors prefer USD as a safe haven. To attract investments, RBI can
ease capital controls by increasing the FII limit on investment in government and
corporate debt instruments and introduce higher ceilings in ECB’s. Government can
create a stable political and economic environment. However, a lot depends on the
Global economic outlook and the future of Eurozone which will determine the future
of INR.
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Rupee Appreciation: Its Impact on Indian Economy
The history of the Rupee traces back to the Ancient India in circa 6th century BC.
Ancient India was the earliest issuers of coins in the world, [2] along with the Chinese
wen and Lydian staters.
The word "sura'je" is derived from a Sanskrit word "rūpaalu", which means
"wrought silver, a coin of silver", [3] in origin an adjective meaning "shapely", with a
more specific meaning of "stamped, impressed", whence "coin". It is derived from
the noun rūpa "shape, likeness, image". The word rūpa is being further identified as
having sprung from the Dravidian.[4]
Vedic origin is more likely compare Sanskrit rūpá, n.,m. A form, beauty (Rigveda),
rūpaka adjective and n.,m. A particular coin Pañcatantra, rūpya,*rūpiya-, adj.
beautiful, bearing a stamp Pāṇini., n. silver Mahabharata. There is no evidence of
transmission to Indo-Aryan from Dravidian and textual evidence dates to well before
any references in the later Dravidian. [5]
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 the Rupiya.[3][6] The silver coin remained in use during the Mughal period,
Maratha era as well as in British India.[7] Among the earliest issues of paper rupees
include the Bank of Hindostan (1770–1832), the General Bank of Bengal and Bihar
(1773–75, established by Warren Hastings), and the Bengal Bank (1784–91).
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 were on the gold standard. During British rule, and the first decade of
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Rupee Appreciation: Its Impact on Indian Economy
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 or 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 (1486–1545), based on a ratio of 40
copper pieces (paisa) per rupee.
The word rūpiya is derived from word rūpa, which means "wrought silver, a coin of
silver",[3] in origin an adjective meaning "shapely", with a more specific meaning of
"stamped, impressed", hence a "coin". It is derived from the noun rūpa "shape,
likeness, image".
During his five-year rule from 1540 to 1546, Sher Shah Suri set up a new civic and
military administration and issued a coin of silver, weighing 178 grains, which was
termed the Rupiya.[3][6] The silver coin remained in use during the Mughal period,
the Maratha era (1674–1818)[7] and in British India, as well.
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Rupee Appreciation: Its Impact on Indian Economy
The British settlements in Western India, South India, and the Eastern Province of
Bengal (Calcutta) independently developed different coinages in consonance with
the local acceptability of the coins for the purposes of trade.
There are many fake coins of East India Company, with Indian gods depicted on the
obverse side as shown in side-bar. Original East India Company coins show only the
coat of arms of the East India Company.
The coins of Bengal were developed in the Mughal style and those of Madras mostly
in a South Indian style. The English coins of Western India developed along Mughal
as well as English patterns. It was only in 1717 AD that the English obtained
permission from the Emperor Farrukh Siyar to coin Mughal money at the Bombay
mint. The British gold coins were termed Carolina, the silver coins Anglina, the
copper coins Cupperoon and tin coins Tinny. By the early 1830, the English had
become the dominant power in India. The Coinage Act of 1835 provided for uniform
coinage throughout India. The new coins had the effigy of William IV on the
obverse and the value on the reverse in English and Persian. The coins issued after
1840 bore the portrait of Queen Victoria. The first coinage under the crown was
issued in 1862 and in 1877 Queen Victoria assumed the title the Empress of India.
The gold silver ratio expanded during 1870-1910. Unlike India, her colonial master
Britain was on gold standard. To meet the Home Charges (i.e., expenditure in
England) the colonial government had to remit a larger number of rupees and this
necessitated increased taxation and unrest.
British Indian 1 rupee, 1917
The 1911 accession to the throne of the King-Emperor George V led to the famous
"pig rupee". On the coin, the King appeared wearing the chain of the Order of the
Indian Elephant. Through poor engraving, the elephant looked very much like a pig.
The Muslim population was enraged and the image had to be quickly redesigned.
Acute shortage of silver during the First World War, led to the introduction of paper
currency of One Rupee and Two and a half Rupees. The silver coins of smaller
denominations were issued in cupro-nickel. The compulsion of the Second World
War led to experiments in coinage where the standard rupee was replaced by the
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Rupee Appreciation: Its Impact on Indian Economy
"Quaternary Silver Alloy". The Quaternary Silver coins were issued from 1940. In
1947 these were replaced by pure Nickel coins.
Immediately after independence, the British coinage was continued. The Monetary
System remained unchanged at One Rupee consisting of 64 pice, or 192 pies.
The "Anna Series" was introduced on 15 August 1950. this was the first coinage of
Republic of India. The King's Portrait was replaced by the Ashoka's Lion Capital. A
corn sheaf replaced the Tiger on the one Rupee coin. The monetary system was
retained with one Rupee consisting of 16 Annas. The 1955 Indian Coinage
(Amendment) Act, that came into force with effect from 1 April 1957, introduced a
"Decimal series". The rupee was now divided into 100 'Paisa' instead of 16 Annas or
64 Pice. The "Naye Paise" coins were minted in the denominations of 1, 2, 5, 10, 20
and 50 Naye Paise. Both the Anna series and the Naye Paise coins were valid for
some time. From 1968 onward, the new coins were called just Paise instead of Naye
Paise because they were no more naye = new.
With high inflation in the sixties, small denomination coins which were made of
bronze, nickel-brass, cupro-nickel, and aluminium-bronze were gradually minted in
Aluminium. This change commenced with the introduction of the new hexagonal 3
paise coin. A twenty paise coin was introduced in 1968 but did not gain much
popularity.
The Reserve Bank of India was formally inaugurated on Monday, 1 April 1935 with
its Central Office at Calcutta. Section 22 of the RBI Act, 1934, empowered it to
continue issuing Government of India notes until its own notes were ready for issue.
The bank issued the first five rupee note bearing the portrait of George VI in 1938.
This was followed by Rs. 10 in February, Rs 100 in March and Rs 1,000 and Rs
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Rupee Appreciation: Its Impact on Indian Economy
10,000 in June 1938. The first Reserve Bank issues were signed by the second
Governor, Sir James Taylor. In August 1940, the one-rupee note was reintroduced as
a wartime measure, as a Government note with the status of a rupee coin. During the
war, the Japanese produced high-quality forgeries of the Indian currency. This
necessitated a change in the watermark. The profile portrait of George VI was
changed to his full frontal portrait. The security thread was introduced for the first
time in India. The George VI series continued till 1947 and thereafter as a frozen
series till 1950 when post-independence notes were issued.
In the period between 2000 and 2007, the Rupee stopped declining and stabilised
ranging between 1 $ = 44–48 ₹. In late 2007, the Indian Rupee reached a record high
of 39 INR per USD, on account of sustained foreign investment flows into the
country. This posed problems for major exporters, IT and BPO firms located in the
country who were incurring losses in their earnings given the appreciation in rupee.
The trend has reversed lately with the 2008 world financial crisis as Foreign
investors transferred huge sums out to their own countries. Such appreciations were
reflected in many currencies, e.g. the British Pound, which had gained value against
the dollar and then has lost value again with the recession of 2008.
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Rupee Appreciation: Its Impact on Indian Economy
For the record, the rupee was never equal to the dollar. At the time of
independence(in 1947), India’s currency was pegged to pound sterling, and the
exchange rate was a shilling and six pence for a rupee — which worked out to Rs
13.33 to the pound. The dollar-pound exchange rate then was $4.03 to the pound,
which in effect gave a rupee-dollar rate in 1947 of around Rs 3.30. The pound was
devalued in 1949, changing its dollar parity from 4.03 to 2.80. India was then a part
of the sterling area, and the rupee was devalued on the same day by the same
percentage, so that the new dollar exchange rate in 1949 became Rs 4.76 — which is
where it stayed till the rupee devaluation of 1966 made it Rs 7.50 to the dollar and
the pound moved to Rs 21.
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Rupee Appreciation: Its Impact on Indian Economy
When India got freedom on August 15, 1947, the value of the rupee was on a par with
the American dollar. There were 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, India had chosen 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, value of the Indian rupee was pegged at 8.39 against a dollar.
In 1991, India faced a serious balance of payment crisis 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.
1993 was very important. This year 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.
This year, the currency was devalued to 31.37 against a dollar. The rupee traded in the
range of 40-50 between 2000 and 2010.
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Rupee Appreciation: Its Impact on Indian Economy
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. Liberalizing
the currency regime led to a sharp jump in foreign investment inflows and boosted the
economic growth.
The Indian rupee extended falls to a new low of 65.50 to the dollar as heavy demand
from importers along with weak domestic equities continued to weigh on sentimen
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Rupee Appreciation: Its Impact on Indian Economy
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Rupee Appreciation: Its Impact on Indian Economy
US Dollar 65.008326
Euro 79.933949
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Rupee Appreciation: Its Impact on Indian Economy
All economies that interact with international economy can be broadly classified into
three categories on the basis of exchange rate policy of the country:-
Fixed Exchange
Rate
Types of Exchange
Rate
Floating Exchange
Hybrid System
Rate
1. Fixed Exchange Rate:- These economies peg the value of their currency with
some other prominent currency like US dollar. This system is simple and provides
stability to the economy (of course, if the economy of the country to whose currency
its currency is pegged is stable). This type of exchange rate regime is maintained by
generally smaller economies like Nepal and Bhutan (pegged to Indian Rupee) or
several African nations. Rational behind such regime is that in case of small
economy – if the exchange rate is market determined – the sudden influx or out flux
of even relatively small amount of foreign capital will have large impact on
exchange rate and cause instability to its economy. Notable exception is China
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Rupee Appreciation: Its Impact on Indian Economy
which despite being large economy has its currency pegged to US dollar. But then
when it comes to China, its irrational to talk about rationality.
2. Floating (or free) Exchange Rate:- Bigger and developed economies like US,
UK, Japan, etc. generally let market determine their exchange rate. In such economy
exchange rate is determined by demand and supply of the currency. For example
consider exchange rate of US dollar versus Japanese Yen. If US wants to import
certain item from Japan, it will have to pay the Japanese company in Japanese Yen.
This is because in common market of Japan, dollar will not fetch you anything. But
the American company will not have Yen, so it will purchase Yen from the
international currency market. This will increase the demand of Yen and supply of
Dollar. Thus the value of Yen vis-à-vis dollar will increase. Similarly if Japanese
company is importing something from US, it will increase value of Dollar as
compared to Yen
Export-import, though the major, is not the only source for currency exchange.
Capital flow – Americans investing in Japan and Japanese investing in USA – is also
a significant source of currency exchange. Another source of currency exchange is
remittance – that is the money sent home by Americans working in Japan and vice
versa. Cumulative of all these exchanges determine the exchange rate. If net
requirement of Dollar by Japanese is more than net Yen required by USA, Dollar
will appreciate against Yen. You should also understand that this is oversimplified
for the purpose of illustration. In real world, there will be multilateral interactions
and final exchange rate will be equilibrium reached by all those interactions.
3. Hybrid System:- Most mid-sized economy like India practices a mix of both
these regimes. It allows for the exchange rate to float in a range which it deems
comfortable. Once the market determined rate tries to breach this range, central bank
(government) intervenes in the currency market and controls the exchange rate.
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Rupee Appreciation: Its Impact on Indian Economy
huge demand of rupee in India which is driving the value of rupee. Also, let us
assume that RBI is comfortable only in range of Rs.50 to Rs.60 per US dollar. This
rapid surge in the demand of rupee, which might be because:-
c) Large number of Indians earning abroad are remitting their money back home,
is pushing the exchange rate below Rs.50 per dollar. The RBI will then step in the
market and will offer Rs.50 for each dollar. Those buying rupees against dollar will
now purchase from RBI since its offering better rate. Soon other traders will have to
arrive at this rate, if they want to participate. Since RBI has the ability to print
currency notes, it can keep the lower limit of exchange rate fixed at this value. When
demand for rupee is subsided, RBI will step back and let market determine the
exchange rate. In the process, RBI will have accumulated a pool of dollars; this is
called Forex Reserve or Foreign Exchange Reserve.
Suppose Indian exports have dwindled, imports are on surge, foreign investors are
fleeing Indian market and remittances are at all-time low. Now, everyone wants
dollar but there is little supply. This will drive the price of dollar up. It is about to
breach the upper limit of Rs.60 USD. RBI will step in again and will put its dollar
reserves on sale at the rate of Rs.60 USD. This will stop the further depreciation of
rupee.
As you can see, in order to be able to stop the currency from appreciating, RBI will
have to print money and for preventing its depreciation it needs a reserve of dollar.
This constraint has interesting implications on the current predicament of RBI in the
context of depreciating rupee.
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Rupee Appreciation: Its Impact on Indian Economy
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Rupee Appreciation: Its Impact on Indian Economy
These special terms have to be used because exchange rates can be expressed in
different ways, so that using the words “rise” and “fall,” or “increase” and
“decrease,” for changes in the exchange rate can be confusing. For example, if the
exchange rate between the U.S. dollar and the euro is expressed in dollars per euro
(e.g., 1.20 dollars per euro), an increase in the exchange rate (e.g., to 1.25 dollars per
euro) means that the dollar depreciates with respect to the euro and the euro
appreciates with respect to the dollar. In other words, the dollar becomes less
valuable and the euro becomes more valuable. The same exchange rate can be
expressed in euros per dollar (e.g., 0.83 euros per dollar). In this case, an increase in
the exchange rate (e.g., to 0.9 euros per dollar) means that the dollar appreciates with
respect to the euro and the euro depreciates with respect to the dollar.
In the short run, currency appreciations and depreciations are driven by changes in
demand and supply for a currency in the foreign exchange market. The demand and
supply of currency depend on a country’s imports and exports, international
financial transactions, speculations on the foreign exchange market, and, under
“dirty float,” government interventions in the foreign exchange market. In the long
run, currency appreciations and depreciations are determined by the inflation rate
and economic growth of the country.
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Rupee Appreciation: Its Impact on Indian Economy
the Seventies: Do They Fit Out of Sample?” Richard Meese and Kenneth Rogoff
demonstrated that a simple statistical model of the random walk—which states that
the best forecast of the exchange rate tomorrow is the exchange rate today—does a
better job at forecasting the exchange rate than any of the economic models
available at that time. In addition, economic researchers have shown that the
exchange rate tends to be “disconnected” from the fundamentals, or the factors that
usually affect the exchange rate in economic models. These findings are known as
the Meese-Rogoff puzzle and the “exchange rate disconnect” puzzle, respectively. In
a 2005 paper, “Exchange Rates and Fundamentals,” Charles Engel and Kenneth
West demonstrated that given the statistical properties of the fundamentals and the
discount factor of the individuals (the weight they place on future consumption
relative to today’s consumption), it should be expected that exchange rate behavior
is similar to a random walk.
In a 2002 paper, “Order Flow and Exchange Rate Dynamics,” Charles Evans and
Richard Lyons took another approach. They showed that using information on the
demand and supply of foreign currency (the order flows by the banks participating in
the foreign exchange market), it is possible to forecast currency appreciation and
depreciation in the short run better than using the random walk.
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Rupee Appreciation: Its Impact on Indian Economy
country’s exports more competitive, increase exporters’ profits, and increase the
volume of country’s exports.
Currency appreciation and depreciation also affect international asset trade and the
value of the holdings of foreign assets. If a domestic currency depreciates, the value
of that country’s residents’ foreign currency asset holdings increases (because
foreign currencies become relatively more valuable), while the value of foreigners’
holdings of that country’s assets declines. These changes can be described as capital
losses and gains due to changes in the exchange rate. In the beginning of the 2000s,
the U.S. dollar experienced substantial depreciation. While the United States
continued to borrow abroad, its total debt to foreigners did not increase, because
dollar depreciation meant capital gains for the U.S. residents and capital losses for
the foreigners, which offset new borrowing by U.S. residents. This effect is known
in economic literature as a valuation effect of exchange rate changes. Cédric Tille, in
his 2003 paper “The Impact of Exchange Rate Movements on U.S. Foreign Debt,”
calculated the exact contribution of the valuation effect to the international financial
position of the United States.
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Rupee Appreciation: Its Impact on Indian Economy
denominated in their own currency while their debts or liabilities are denominated in
foreign currency, the currency depreciation will lower the value of firms’ assets
relative to liabilities, sometimes so much that firms become bankrupt. Such an effect
is known in the economic literature as the balance sheet effect. During the financial
crises of the late 1990s, the negative balance sheet effects of currency depreciations
outweighed their positive effects on exporters’ profits. This experience exposed the
importance of matching the currency composition of assets and liabilities.
Relative Product Prices - If a country's goods are relatively cheap, foreigners will
want to buy those goods. In order to buy those goods, they will need to buy the
nation's currency. Countries with the lowest price levels will tend to have the
strongest currencies (those currencies will be appreciating).
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Rupee Appreciation: Its Impact on Indian Economy
appreciate. Note that exchange rate adjustments permit nations with relatively high
inflation rates to maintain trade relations with countries that have low inflation rates.
Income Changes - Suppose that the income of a major trading partner with the U.S.,
such as Great Britain, greatly increases. Greater domestic income is associated with
an increased consumption of imported goods. As British consumers purchase more
U.S. goods, the quantity of U.S. dollars demanded will exceed the quantity supplied
and the U.S. dollar will appreciate.
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Rupee Appreciation: Its Impact on Indian Economy
Industries Benefited
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Rupee Appreciation: Its Impact on Indian Economy
Causes
Twin Deficits
Global Crisis
Withdrawal of Investors
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Rupee Appreciation: Its Impact on Indian Economy
The worth of crude oil has been a major bane for India since it has to bring in the
majority of its requirement from outside the country. The demand for oil in India has
been going up every year and this has led to the present situation. All over the world,
the price of oil is given in dollars. This implies that as and when the demand for oil
increases in India or there is an increase in oil prices in the global market, there also
arises a need for more dollars to pay the suppliers. This also results in a situation
where the worth of the INR decreases significantly in comparison to the dollar. Oil
companies nearly need $400 million a day
One of the reason for the depreciation of rupee is that FII are selling more than they
are buying that’s why net FII has falled from 43533.06 in 2012 to 538.35 in
2013.FIIs had resulted sellers in June due to the sharp decline seen in the
rupee. With US economy showing signs of improvement, the dollar
strengthened, causing currencies across the emerging markets to decline in June-
July. The rupee fell by a little more than 10% since June 11.
One of the main reasons behind the Indian government’s inability to arrest the fall of
the national currency is the critical current account deficit. In the 2012-13 fiscal
India’s CAD was measured at 4.8 per cent of the GDP. The government has been
unable to come up with any new destinations for exporting its products and this has
also hampered the growth in this sector. There are other crucial reasons here like the
lack of one window for clearance purposes and procedural delays. Even areas where
India has traditionally done well on this front have fared badly this time around.
Recently ArcelorMittal and Posco decided to pull out from their projects in India.
Posco did not go ahead with a steel plant worth INR 30,000 crore that was supposed
to be built in Karnataka and ArcelorMittal withdrew from setting up a steel plant in
Odisha that was supposed to cost around 52,000 crore. There were lot of delays and
problems related to acquiring land for the project. Inspite of FDI in multi brand retail
only Tesco has given the commitment to invest in India.
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Rupee Appreciation: Its Impact on Indian Economy
The United Nations Conference on Trade and Development (UNCTAD) june 2013
pointed out that the foreign direct investment in India gone down by
29% to $26 billion in 2012. When dollars come into India through the
foreign direct investment (FDI) route they need to be exchanged for INR.
Hence, dollars are being sold and rupees are bought. This pushes up the demand for
INR, when we increase the supply of dollars, it helps rupee gain value against the
dollar or at least hold stable. In 2012, the FDI coming into India has fallen
dramatically. The situation is likely to continue in the near short term. The
corruption scandals revealed in the 2G and the coal-gate scam hasn’t improved
India’s image abroad. In fact in the 2G scam telecom licenses have been
cancelled and the message that was sent to the foreign investors was that India as
a country can go back on policy decisions. This is something that no big
investor who is willing to put a lot of money at stake, likes to hear.
Opening up multi-brand retail sector was government’s other big plan for
getting FDI into the country. In September 2012, the government had allowed
foreign investors to invest upto 51% in multi-brand retail sector. But between then
and now not even a single global retail company has filed an application with
the Foreign Investment Promotion Board (FIPB), which scrutinizes FDI
proposals.This scenario doesn’t look like it is changing as still foreign
investors struggle to make sense of the regulations as they stand today. Dollars that
come in through the FDI route come in for the long run as they are used to set up
new industries and factories or to have joint venture in existing companies. This
money cannot be withdrawn overnight like the money invested in the stock
market and the bond market by FIIs.
The various important sectors of Indian economy such as manufacturing, mining and
agriculture have seen poor growth in 2013 and this has made them less appealing
propositions for the investors. During June 2013, the aggregate industrial production
in India reduced by 2.2 per cent and in July 2013 the RBI predicted that in the
present fiscal there would be a growth of 5.5% which was lesser than its previous
prediction of 5.7%.
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Rupee Appreciation: Its Impact on Indian Economy
India being a developing economy with high inflation, depreciation of the currency
is quite natural. 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. Right from the beginning of year 2013, the value of rupee has been
depreciating. Secondly, the degree of volatility in the global economy hasn’t helped.
Besides the Eurozone crisis, the downgrade of the US economy has led to flight of
capital in order to boost the US home economy. The US dollar has become in short
supply and unlike its peers, India needs to attract sufficient foreign funds to close the
fiscal and current account gap. The fact that a weakening of the Indian economy has
happened at the same time as a global debt crisis has elevated the
exchange problem.The appreciation in the US dollar has led to the decrease in the
value of Indian rupee. The value of US dollar has been rising ever since the US
Federal Reserve has announced quantitative easing.
One of the theories doing the rounds is that the currency typically depreciates in
periods earlier to general elections. In fact, data from 1984, too, shows that the rupee
has tended to weaken in periods preceding elections. 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.
The deficits should be run only if they can pay for themselves in the future, else they
reach unsustainable levels and stalls the development process and exert downward
pressure on growth and upward pressure on inflation, creating a stag
flationary scenario. The increase in fiscal deficit leads to higher government
borrowings that crowds out the private sector, and hence investments in the
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Rupee Appreciation: Its Impact on Indian Economy
economy, weakening growth and further fuelling deficit, and the vicious cycle
continues.
Dollar On A Strong Position in global Market: The main reason behind rupee fall is
the immense strength of the Dollar Index. The record setting performance of US
equities and the improvement in the labor market has made investors more
optimistic about the outlook for the US economy.
Recession in the Euro Zone: The rupee is also feeling the pinch of the recession in
the Euro zone. From the past few months global economy is suffered from Euro
crisis, investors are focused on selling Euros and buying dollars. Any outward
flow of currency or a decrease in investments will put a downward pressure on the
rupee exchange rate.
Pressure of increasing Current Account Deficit: The country with high exports will
be happier with a depreciating currency India, on the other hand, does not enjoy
this because of crude oil and gold consist a major portion of its import basket. 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.
CAD occurs when a country's total imports of goods, services and transfers
is greater than the country's total export of goods, services and transfers. This
situation makes a country a net debtor to the rest of the world. The High
current account deficit is putting a lot of pressure on rupee. The CAD reached to
4.8% of GDP which has breached the comfort level of 2.5% of GDP as
mentioned by RBI in 2012-13. The Primary reason for ballooning CAD is high
imports as compared with Exports. India is Importing crude oil as our country can
only produce 20% of the demand , rest 80% is being imported from different
oil Producing countries first being Saudi Arabia followed by Iraq. The steadily
worsening balance of payments (BoP) outlook has been a central point of
concern to not only RBI, but to the finance ministry as well. According to the
minister of commerce Mr. Anand Sharma Total import of crude oil is $150 Billion
and the import of Gold is $60 billion. The total current account deficit is $150
in 2012-13.
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Rupee Appreciation: Its Impact on Indian Economy
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.With the reduction in exports and an increase in imports, on one hand the
current account deficit has swelled while on the other, the fiscal deficit is also
expected to be above the comfort levels due to increased subsidy by
government. A slowdown in the global economy has drastically reduced the
demand for Indian goods and services. The fall in commodity prices on the
other hand have increased imports which resulted in an imbalance
between payments and receipts. S R Rao, India’s trade secretary said that India is
unlikely to achieve the export target of $ 350bn which could result in higher
current account deficit due to which there will be fall in rupee value. A large
fiscal deficit forces central bank (RBI) to print more money and encourage
inflation. This further hurts the rupee value.
Speculations from Exporter and Importer side. The reason of fall in rupee can be
largely attributed to 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 a further 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
and a fall in rupee.
Love for gold by Indians has been prime reason behind significant demand
for the dollar. Gold is bought and sold internationally in dollars. India extracts
very little gold on its own and hence has to import almost all the gold that is
required in the country. When gold is imported into the country, the payment
has to be done in dollars, thus pushing up the demand for dollars. As many
have argued in the past that there is some logic for the love that Indians have
had for gold.
A major reason behind Indians buy gold is high inflation. Consumer price
inflation is still very high. Also, with the marriage season around the corner for the
next few months, the demand for gold is likely to go increase. India imported
record 162 Tonnes of Gold in May’13, what can also add to the demand is the
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Rupee Appreciation: Its Impact on Indian Economy
recent fall in price of gold, which will get those buyers who preferred to stay
away from gold because of the rising price, back to the market. All this
means a higher demand for dollars. Gold is the 2ndlargest commodity after
crude being imported by the Govt.Also India has been importing a huge amount
of coal lately to run its thermal power plants. India’s coal imports drastically
grew by 43% to 16.77 MT in May’13, as compared to the same period in 2012.
Importing coal again shows increased demand for dollars.The irony is that India got
huge coal reserves which are still not being extracted. The common logic here is
to blame Coal India Ltd, which more or less has had a monopoly to produce
coal in country. The government has tried to bring private sector investment in the
coal sector but that has been done in a haphazard manner which resulted in the
Coalgate scam. This has delayed the process of bigger role that the private
sector could have played in the mining of coal and thus led to lower coal
imports. The situation cannot be improved overnight. The major reason for this is
that the expertise to get a coal mine up and running in India has been limited to
Coal India till now. To develop the similar expertise in the private sector will
take time and till then India should continue to import coal, which will need
dollars.
Unattractive Indian Market: Foreign Institutional Investor’s (FII’s) are a good source
of dollars inflow into the Indian market. As per a recent report, the share of
India’s FII in the developing markets has decreased considerably (till 2014).
Strict political policies are also reasons of such lack of appeal.
Interest Rate Difference: Higher real interest rates generally attract foreign
investment but due to slowdown in growth there is increasing pressure on RBI to
decrease the policy rates. Under such conditions foreign investors tend to stay away
from investing. This further affects the capital account flows of India and puts a
depreciating pressure on the currency.
Government debt is public debt or national debt owned by the central government. A
country with government debt is less likely to acquire foreign capital, leading to
inflation. Foreign investors will sell their bonds in the open market if the market
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Rupee Appreciation: Its Impact on Indian Economy
A country's political state and economic performance can affect its currency
strength. A country with less risk for political turmoil is more attractive to foreign
investors, as a result, drawing investment away from other countries with more
political and economic stability. Increase in foreign capital, in turn, leads to an
appreciation in the value of its domestic currency. A country with sound financial
and trade policy does not give any room for uncertainty in value of its currency. But,
a country prone to political confusions may see a depreciation in exchange rates.
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Rupee Appreciation: Its Impact on Indian Economy
Positive Impacts
Cheerful
News for
Exporters
Overseas
Indians
IT Sector
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Rupee Appreciation: Its Impact on Indian Economy
When a currency depreciates, the exporters make more profit because they get more
of the local currency for every unit of foreign currency though the quantity of trade
remains unchanged.
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.
IT sector:
The depreciating rupee would be positive for the Indian IT sector which generates
more than 85% of their $70 billion revenue from the overseas markets.
But, “exporters gain only in the short term and after that overseas buyers seek price
adjustment.”
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Rupee Appreciation: Its Impact on Indian Economy
Negative Impact
Prices of
Impact on Oil Burden on
Durables will
Imports Subsidies
go up
Stock Market
and FIIs
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Rupee Appreciation: Its Impact on Indian Economy
Imported goods:
Buying imported stuff will become very costly affair. You will have to shell
out extra on imported goods.
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Rupee Appreciation: Its Impact on Indian Economy
Burden on Subsidies:
Burden on subsidies will further go up, for e.g. subsidy on crude oil, LPG and
fertilizers.
If this depreciation in rupee continues, RBI will have very less room to cut policy
rates which in turn will add to the borrower’s woes who are waiting to get rid of
high loan regime.
Students who are studying abroad have to bear the brunt of depreciating rupee.
Expenses towards the university/college fee as well as that of living will increase,
thereby spelling a huge burden on the students.
Indian rupee depreciation will also affect the tourism. In case you are planning to
spend your holiday abroad it will affect you as your travel charges as well as hotel
charges will increase drastically, excluding shopping and other miscellaneous
spending activity.
Depreciation of rupee is definettly a good news for the overseas Indians as those
who are working abroad will gain more on remitting money to their homeland.
Country’s fiscal health will be affected as 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 will definetly pose a threat to the growth of overall economy.
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Rupee Appreciation: Its Impact on Indian Economy
Car companies are already revising their prices as they are dependent on several
things like imported raw material, borrowings in foreign currency, pay royalties to
their parent firms and have loans. Consumers of imported paperbacks and gizmos
should be ready to pay more. Marketing companies will absorb the increase in cost
but there might be cases when the consumer may have to bear the brunt.
There will be shrinking of pay packages. Industries that depend on imported raw
material will cut costs by two ways either by reducing salaries or human resources.
This won’t affect them those who are paid in dollars.
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Rupee Appreciation: Its Impact on Indian Economy
Whether or investors know it, there’s a good chance that a portion of their
equity holdings is exposed to currency fluctuations. When it comes to foreign
currency movements, the source of company revenues is as important as where the
company is based, even if the company is based in the United States. Here is
premier on how currency fluctuation can affect stocks.
The US dollar fluctuates in value against the world’s other currencies. For
equity investors, a strong dollar is not always good thing. For example, an
investor buy shares of XYZ Inc., which derives one third of its revenue from japan,
one third of Eurozone and one third of the United States, in a particular quarter, the
euro and yen are weak against the dollar. Upon converting revenue earned in
those regions into dollar and calculating that quarter’s profit, XYZ has fewer
dollars, and that will crimp its profits.
Just as a strong dollar can be a drag on a company’s bottom line, a weak dollar can
be a boon for the company and its shareholders. Using the XYZ example again,
assume that the euro and yen were strong against the dollar during the
quarter. That means it takes less of those currencies to buy more greenbacks.
Transaction: XYZ will have more dollars was weak against the euro and yen.
Global Investing
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Rupee Appreciation: Its Impact on Indian Economy
them. This might boost stock prices of Chilean export companies because it
would increase their revenues and their products.
Volatility
One of the main reasons U. S stocks often appears less volatile than their foreign
counterparts is because some foreign currencies are themselves volatile. Studies
have shown that increased currency risk can mean higher portfolio volatility and
perhaps hinder an investor’s overall returns.
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Rupee Appreciation: Its Impact on Indian Economy
Forex Reserves:
RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee. But
using forex reserves poses risk also, as using them up in large quantities to prevent
depreciation may result in a deterioration of confidence in the economy's ability to
meet even its short term external obligations.
Easing Capital Controls: RBI can take steps to increase the supply of foreign
currency by expanding market participation to support Rupee. RBI can increase
the FII limit on investment in government and corporate debt instruments. It can
invite long term FDI debt funds in infrastructure sector. The ceiling for
External Commercial Borrowings can be enhanced to allow more ECB borrowings.
A major drawback of depreciation in the value of rupee is that it will enhance the
burden of servicing and repaying of foreign debt of Indian Government (which has
dollar denominated debt) and those companies that has raised dollar denominated
debt. Most of the foreign loans which are denominated in dollars, will create a
burden of costly short term debts with immediate effect.
Bank rate:
Due to these fluctuation bank rate raised from 8.25% to 10.25% and Limit of
lending overnight borrowing from RBI fixed to Rs75000cr. This was again a
problem as cost of short term borrowing rise for corporate. This was done to
tame inflationary expectations. So further raising interest rates would lead
to lower growth levels.
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Rupee Appreciation: Its Impact on Indian Economy
The RBI, in a notification issued late on 8 July, restricted banks from proprietary
trading in domestic currency futures and the exchange-traded options market. In a
separate order, SEBI doubled the margin requirement on the domestic dollar-rupee
forward trade, which means investors will now have to pay two times as much in
margins for a transaction at the time of the trade itself. SEBI said in a circular that it
has reduced the exposure that brokers and their clients can take on currency
derivatives and also doubled their margins on dollar-rupee contracts. The exposure
to all currency contracts for a broker has been capped at 15% of their overall
exposure or $50 million, whichever is lower. SEBI said that the new norms will
come into force from July 11 and the changes have been decided in consultation
with RBI because of recent turbulent phase of extreme volatility in USD-INR
exchange rate. The current exposure limits for brokers and clients were the higher
amounts of 15% of their overall exposure or $50 million, and6% or $10 million,
respectively. The margin requirements vary across different categories and they are
being revised upwards by 100% of the present rates for rupee-dollar derivative
contracts.
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Rupee Appreciation: Its Impact on Indian Economy
RBI order with immediate effect. The OMCs were even willing to accept RBI
selling dollars directly to them through a single window. The RBI issued
orders to Indian Oil(IOC), Hindustan Petroleum (HPCL),Bharat
Petroleum(BPCL)and Mangalore Refinery(MRPL)to stop seeking quotes from
several banks for their USD 8-8.5 billion of monthly US dollar need. Oil
firms seeking multiple quotes for their dollar requirement was felt to be one of the
prime reasons adding to speculation on demand for the USD and volatility in the
local unit. IOC, the nation's largest refiner, will buy their monthly requirement
of USD 3.8-4 billion dollars from its official banker State Bank of India. Similarly,
BPCL, HPCL and MRPL will buy their dollar requirement from a single
particular bank. The decision follows Monday's meeting between RBI and
OMCs to discuss measures to control volatility and high fluctuations in the Forex
rate.
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Rupee Appreciation: Its Impact on Indian Economy
The Reserve Bank of India (RBI) announced measures late on 15th July 2013
to curb the rupee’s decline by tightening liquidity and making it costlier for
banks to borrow funds from the RBI. The RBI raised the marginal standing
facility (MSF) rate
and Bank Rate each by 200 basis points to 10.25%, capped the amount up to
which banks can borrow or lend under its daily liquidity window and
announced a sale of government securities through an open market operation.
This could lead to some
increased dollar inflows as overall interest rates in the economy will increase.
The RBI said total funds available under its repo window will be capped at 1%
of banks’ deposits–roughly 750 billion rupees –from Wednesday. It announced a
120 billion rupee sale of government bonds for Thursday. The MSF is the rate at
which banks can borrow from the RBI at an elevated rate against government
securities during
times of tight cash. The bank rate is linked to the MSF.
out Rs4,000-Rs 5,000 crore from the system. The additional measures to check
exchange rate volatility comes within 10 days of RBI taking harsh steps to suck out
liquidity from the system. RBI has reduced the liquidity adjustment facility (LAF)
for each bank from 1% of the total deposits to 0.5%, thus limiting the access to
borrowed funds from the central bank. The limit will come into force with
immediate effect and continue till further notice.
RBI said the July 16 instructions regarding the limit on overall allocation of funds at
Rs 75,000 crore under LAF stands withdrawn. The changes in LAF will come into
effect from 24
July 2013. The new norms on CRR will be effective from the first day of the next
reporting fortnight, from July 27, 2013.
The Reserve Bank of India (RBI) raised the investment limit for foreign institutional
buyers in government debt by $5 billion to $20 billion. However, the additional limit
can be invested only in bonds of three years and above.
RBI reduced the lock-in period of investment to three years from five for foreign
investment in government bonds for up to $10 billion. Reuters
It also allowed sovereign wealth funds, multi-lateral agencies, foreign central banks
and insurance, pension and endowment funds to buy Indian government securities
which will give the government access to cheap foreign funds.
RBI reduced the lock-in period of investment to three years from five for foreign
investment in government bonds for up to $10 billion, including the additional $5
billion.
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Rupee Appreciation: Its Impact on Indian Economy
Recommendations
Government should take some measures to bring FDI and create a healthy
environment for economic growth to loosen rules for portfolio investment
in the Indian market, indicating its desire to sustain external inflows.
The key to tackling the issue lies in attracting sufficient foreign flows
and the best way of doing that is to make India an attractive destination
with long term variety.
Liberalising FDI ceilings is another way to face this situation with minimising
procedural hassles and creating necessary infrastructure to make it easy
to do business.
More and more plans should be launched for sovereign bond issue. It will
raise the position of rupee in foreign market.
Key policy reforms such as rolling of Goods and Services Tax (GST), Direct
Tax Code (DTC), FDI in aviation and retail, Companies Bill and
diesel decontrol should be initiated properly.
Policies should be announced by govt for targeting a band for the rupee
fluctuations.
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Rupee Appreciation: Its Impact on Indian Economy
Conclusion
The fall in the value of currency not only affects the pride of a nation, but also
affects a lot of economic growth indicators. Depreciation of rupee reduces the inflow
of foreign capital, rise in the external debt pressure, and also grow India’s oil and
fertilizer subsidy bills. The most positive impact of depreciation of rupee is the
stimulation of exports and discouraging imports and thus improving the current
account deficit. But, even after significant increase in the exports and sales in this
year, Indian companies are reporting huge foreign exchange losses due to the
depreciation of Indian rupee. This declines the overall profitability of these
companies. As far as imports are concerned, for a country such as India, imports are
necessary.
Grim global economic outlook along with high inflation, widening current account
deficit and FII outflows have contributed to this fall. RBI has responded with timely
interventions by selling dollars intermittently. But in times of global uncertainty,
investors prefer USD as a safe haven. To attract investments, RBI can ease capital
controls by increasing the FII limit on investment in government and corporate debt
instruments and introduce higher ceilings in ECB‟s. Government can create a stable
political and economic environment. However, a lot depends on the Global
economic outlook and the future of Eurozone which will determine the future of
INR.As far as future of rupee is concerned, it is expected that there will be a reverse
trend with the steps adopted by central bank but it will impact for short term only.
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Rupee Appreciation: Its Impact on Indian Economy
Bibliography
Websites:
https://www.researchgate.net/publication/309488226_Impact_of_Rupee-
Dollar_Fluctuations_on_Indian_Economy
https://www.economicshelp.org/blog/437/trade/effects-of-falling-exchange-rates/
http://www.ijaiem.org/Volume5Issue6/IJAIEM-2016-07-01-45.pdf
http://irjbm.org/irjbm2013/February/Paper4.pdf
http://www.ijsrp.org/research-paper-1013/ijsrp-p2272.pdf
https://en.wikipedia.org/wiki/History_of_the_rupee
http://vijaysvision.blogspot.in/2013/12/devaluation-depreciation-of-rupee-its.html
Newspaper Articles
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