Anand Adhikari

Not to forget two major devaluations by the government in between. The rupee was devalued first in 1966 by a massive 60 per cent from Rs 4.76 to Rs 7.50 against the US dollar. Twenty five years later in the 90s, the rupee was again devalued by 20 per cent from Rs 20.5 to Rs 24.5 against the US greenback. The reasons for the two devaluations were not too dissimilar; twin deficit (current account and fiscal), soaring inflation, insufficient foreign exchange reserves, and the developed world demanding decontrol and liberalization to allow them to do business in India. Pranab says RBI to look into rupee slide if necessary But, the reason for the current round of rupee depreciation is related more to current grim global economic environment. The currency of every other emerging economy - barring China that managed its currency peg against the US dollar - is falling like nine pins. The currencies of Russia, Brazil, South Korea, and Indonesia have plunged by between six per cent to 16 per cent since January this year. So the 10 per cent fall in the value of rupee against the US dollar is hardly out of context. Still, the ill-fated dollar is finally emerging from the debris thanks to euro crisis. The sovereign debt woes of European Union are shifting foreign investors from euro assets to dollar assets. There seems to be no other alternative to US dollar. The gold rush, too, is waning a bit as there is now a feeling of a bubble building up. Where does this leave the rupee? There is no support from the domestic economy. Foreign institutional investors are already fleeing Indian equity markets. The FDI investments unlike China were never big into India, anyway. Inflation is near all-time highs and interest rates are pinching companies as much as home borrowers. The fastest growing economy is also turning out to be the slowest in terms of reforming the economy or tackling pressing economic issues. Rate hikes will not tame inflation, says India Inc So, all eyes - read: importers - are on the Reserve Bank of India, or RBI, to pull a rabbit out of the hat. But that is easier said than done. If the Mint Street sells dollar to arrest the rupee fall, the apex bank has to pare down its foreign exchange reserves, not matter how huge it is.

Secondly, this will also result in sucking out equivalent amount of rupee resources from the system, potentially squeezing liquidity. But the catch is any aggressive (mild ones will continue) open defence by the RBI to arrest fall will be read as an inherent weakness of the rupee vis- -vis the dollar. That will mean giving speculators a chance to create further havoc with the likely rupee fall. In fact, the RBI was in a similar situation in the 2007/08 period when rupee actually appreciated on the back of dollar inflows from foreign institutional investors into Indian equity markets. The exporter community cried hoarse from the rooftops but the central bank allowed the rupee to find its own level though with minor intervention. The rupee finally appreciated to a record Rs 39.37 levels in January 2008. Like all the earlier phases in rupee's journey, the current phase of depreciation will also pass and rupee will find its own level.
ndian Rupee is in a free-fall, having slipped by over 15 per cent this year making it the worst performing currency in Asia, and the third worst globally. The currency slid to an all-time low of 52.73 against the US dollar, on November 22, but bounced back by over a per cent a day later due to suspected intervention by the Reserve Bank of India. On November 30, it closed at 52.21 agiant the US dollar. Traders said the RBI intervened (meaning, sold dollars) to the tune of $2.5-3 billion since the rupee touched all-time lows. RBI Governor D Subbarao, however, declined to confirm the RBI had intervened. The general perception amongst experts is that until the global macro-economic environment stabilises, the rupee will continue to be under pressure as investors the world over flock to safer currencies like the dollar.
PTI | May 22, 2012, 05.25PM IST

NEW DELHI: The government on Tuesday said the global slow down due to the eurozone crisis has impacted the Indian economy and steps are being taken to tackle the situation. "Global slowdown due to unfolding of eurozone sovereign debt crisis has, inter-alia, impacted the Indian economy through deceleration in exports, widening of trade and current account deficit, decline in capital flows, fall in the value of Indian Rupee, stock market decline and lower economic growth," finance minister Pranab Mukherjee said in a written reply to the Rajya Sabha. Export oriented industries and the capital investment are the most affected sectors, he said. Mukherjee said the government is taking a number of steps to arrest the decline of rupee, which breached the psychological 55-level on Monday. A number of steps have been taken to augment the supply of foreign exchange to

stem rupeedecline, he said adding measures have also been taken to increase direct foreign investment for infrastructural development. He said the steps included liberalisation of external commercial borrowings (ECB) policy and portfolio investment norms besides steps to improve access to corporate bond market through Infrastructure Debt Funds. The RBI has also taken initiatives to curb speculation in the foreign exchange market, he said. This included raising of NRI deposit interest rates, easing availability of export credit and stipulation that 50 per cent of balances in the Exchange Earner's Foreign Currency Account be converted into rupees balances, he said. "A number of legislative measures/amendments have also been taken for fiscal consolidation/reforms and financial sector reforms," Mukherjee said. RBI intervention when necessary With rupee falling to record low against dollar, finance minister Pranab Mukherjee on Tuesday said the government is taking steps to arrest volatility in the foreign exchange market and the RBI will intervene when necessary. "The government is taking a series of steps. However, managing rupee is market-related.... There is a lot of volatility," he told reporters here. The Indian rupee slid to a fresh low of Rs 55.32 against the US dollar in the afternoon trade on Tuesday as foreign funds pulled out from emerging markets avoiding risky assets. "As and when RBI will consider necessary they will intervene. It depends on the market forces and market forces are uncertain," Mukherjee said. The rupee has been one of the worst performing currencies in Asia and has been consistently hitting lows in the last fortnight, in spite of RBI interventions by selling dollars in the forexmarket. The rupee has lost over 22 per cent since the beginning of the year. Global risk aversion is putting pressure on the domestic currency as foreign funds are pulling out money. Besides, a widening current account deficit and concerns of investment in India is also putting pressure on the rupee. To check the sliding rupee, RBI has taken a slew of policy steps to increase dollar flows,

including relaxing interest rates caps on non-resident deposits and asking exporters to convert half of their foreign currency earnings into rupee.
Pranab says 'there is crisis in Europe and US and their currency is appreciating'. They are dominant exporters and come out of the anticipated crisis very soon. But till then India would lag twenty years. Indian govt. has nothing to define and forward to justify present Indian economic crisis. The export sector is doing better and imports are not considerably high too. Then what is wrong with the economy? Why to allude foreign countries? Pranab and Manmohan need special tuition or a hard slap to clean the mental rust. RBI needs urgent schooling. They must quit their positions if they are true patriots and have even a little concern for the plight of our country. UPA has not even single minister who deserve to hold the position they have. UPA is following negative approach since last seven years but the result took vehement shape and size now a days. During NDA govt. the approach was quite positive and rational. Then govt. gave highest priority to development oriented infrastructure sectors and kept persuading foreign investors. NDA exerted higher force to introduce inter-net and mobile phones along with broad and safe High Ways and roads approaching even most remote rural places to ease fast and firm interactions, deals and transactions. This gave very huge mobility to commercial sectors and India stepped in to the race track of highly developed countries. One month transaction turned in to one week and on the way to turn in to one day. So fastly the economy was growing and UPA misinterpreted the policies concentrated on development and ignored the rural life of farmers. And in 2004 NDA succumbed to its boosting economic policies and UPA come on to power self shocked. The reformations made by NDA was in full swing yielding best at post reformation period and UPA took it to its credit and our Indians were very happy and least bothered to recognise the performers as well as the reasons. UPA was returned to power again till then the policies pay the needy, take the vote and avoid poverty for a few days. UPA believes in savings to overcome crisis where as NDA believes in spending thereto. That is modern economic pragmatic approach. Economists who studied out dated economics can hardly understand and can never agree with it until they study the thesis of modern economics thoroughly.

As the Rupee hits new all time lows against the Dollar, it is natural to look for ways to arrest this slide and look for solutions to this problem. The problem however is the not the Rupee slide itself the fall in the Rupee is the symptom of underlying problems and you have to look at those problems to find solutions. You can take short term measures to stop the fall but if they are not backed by long term efforts to correct the underlying problems, nothing will change and we will have to deal with the same situation 8 or 12 months down the line. RBI allowing banks to set their own interest rates on NRE deposits and making these NRE deposits tax free is a good example of a short term measure. That would have surely helped bring in foreign exchange at the time, but since January, the Rupee has already lost 9% against the Dollar so whatever gains an NRI will make on the interest have already been nullified by the loss in the value of Rupee, and any similar measure is not going to be as attractive a second time.

While such short term measures are essential at the time of volatile downturns, past experience has shown that they arent enough to reverse the trend over a longer duration. The exchange rate depends on the demand and supply of INR and foreign currencies, and that relationship is shown in the current account and capital account of the country. Simply put, the current account is the account that shows the imports and exports of goods and services and the capital account is the account that shows the money invested by foreigners in India, and money invested by Indians outside the country. As far as I know, India has never had a trade surplus, which means it has never exported more than it imported and the deficit that occurs as a result of this has been met by investments by foreigners in the form of FDI and FII inflows in India. But recently, even those have slowed down putting pressure on the currency. A simple fish bone diagram will help explain this better.

Rupee Slide

Current Account Deficit The current account deficit as measured by the difference between exports and imports of goods and services has never looked in worse shape. The trade deficit last fiscal was $184.9bn, and this is as high as 9.9% of GDP. On the import side, higher oil prices, and gold imports are causing a lot more outflow than previous years and as I wrote in January, these two alone contributed to 43% of Indian imports. Exports have been slowing down too and in fact March of 2012 actually saw a drop in exports from a comparable period a year ago, something that hadnt happened for more than two years. Capital Account Deficit On the capital account, FDI has been in the news for all the wrong reasons. Even historically, India has attracted lower FDI when compared with other emerging countries and the lack of reforms and the inability to make any progress on issues like FDI in multi-brand retail means that India has been below its potential in attracting FDI from the world.

FII investments have dried up due to the global flight to safety because of the resurfacing Euro concerns, but even before that, after the GAAR announcement in the budget, the FII volume had reduced quite a bit in the Indian market. Investments also depend on the general economic environment and that hasnt been good in the past few years leading to an environment which doesnt inspire confidence in investors (both global and domestic) to put money in the market. If you look at these factors, some of them are within Indias control and some arent India cant do anything to influence oil prices, or do anything about the Euro problems but it can certainly take steps to simplify labor laws, get clearances fast, build infrastructure to get foreign investments and other such things. These things need to be done anyway to help improve the standard of living of the people in the country, the volatile Rupee fall just gives a sense of urgency to carry them out.

How do the oil prices affect the Rupee Dollar exchange rate?
by MANSHU on AUGUST 24, 2008 in OPI NI ON

At the beginning of 2008 the Rupee rate went as high as 39 to a Dollar and at that time it didnt look like it will be back to 43 so soon. Economists and Analysts were heralding this as a new era and were asking everyone to reconcile to the new realities of the market. Just a few months down the line everything has changed. While there are many reasons that pushed the Rupee to 43 levels, perhaps the most unexpected was that oil prices went up to $143 a barrel. India imports 70% of its oil needs and when the price of oil doubles, it makes a big dent on the countrys fiscal balances. The current account deficit has almost doubled from 2007 in terms of value, and has reached 1.5% of GDP, up from 1% of GDP last year.

Basically that means that to continue to fund Indias imports, the country needs to keep buying dollars and by doing that the value of the Dollar goes up while the value of the Rupee goes down. High oil prices also mean that the oil companies need to buy Dollars in order to get hold of the expensive oil and further push down the Rupee value. In absolute terms every 10 dollar increase in the price of an oil barrel increases the current account deficit by roughly $6.5 billion dollars and this has to be funded by more dollars. The RBI has sufficient dollar reserves to ease the pressure off the rupee decline, but the high levels of inflation do not allow it to buy off dollars in the open market as freely as it used to do earlier. All these factors play out together and push the rupee value down, which is good for exporters but not so good for oil prices and the trade deficit.