depreciation in rupee valuee

Depreciation in value of RupeeDepreciation in Rupee value

PREPARED BY : ANKUR KISHANPURIAROLL No. : 201TOPIC : DEPRECIATION OF RUPEEGUIDE : PROF. S. LOBWO


Depreciation refers to a fall in the value of the domestic

currency which is caused by the demand for foreign

currency exceeding its supply in the market. In such a

situation one has to pay more than before to get units of

foreign currency.

Rupee has been under a 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. economy.

INTRODUCTION


RESEARCH OBJECTIVE

To delve into the fundamental causes of rupee fall – The study aims to find the primary reasons behind depreciation in rupee.

To examine the impact of falling rupee - This study seeks to observe the impact of falling rupee on trade, commerce and life of common man.

To analyze the steps taken by the government to curb rupee fall - The study intends to examine the measures taken by the Government and RBI to restraint the rupee fall.


Nature of Study - It is an analytical study meant to find the cause and effect analysis of rupee depreciation.

Nature of the Data - Secondary data has been the key source of research for the proposed study.

Sources of Data –Various different journals, paper articles, e-books have been the source of secondary data. Secondary data has also been collected from Annual Magazines of Selected Economic Forums and Educational Institutions. Analytical Tools – Data collected from different sources have been analyzed in a typical manner and compiled into charts – Bar Graph and Pie chart for ease of reference.

RESEARCH METHODOLOGY


• Tapering of Quantitative easing - 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 tapering of Quantitative easing and restricting supply of US $ 85 billion per month to boost US economy.

• High Current Account Deficit – CAD occurs when a country's total imports of goods, services and transfer 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.

CAUSES OF RUPEE FALL


• High Foreign Institutional Investor Outflows.-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 the rupee to fall.

• Unreasonably High Imports - Gold and fuel are the main imports of India. India imported a record 162 Tonnes of Gold and 16.77 MT ( increased by 43%) of coal in May’13.

• Time to Repayment of External Commercial Borrowings - In beginning 2004, the RBI had approved nearly $220 billion worth of external commercial borrowings and foreign currency convertible bonds (FCCB). Much of this ECB will have to be repaid in the financial year, putting further pressure on the Indian currency.

CAUSES OF RUPEE FALL


•Impact of depreciation on the Balance of Payments – Depreciation of rupee has made the imports expensive. Increasing costs of imports also affects exports, thereby wiping out any global cost advantage accruing from the devaluation. For example, important export sectors such as gems and jewellery, automobiles, machinery and chemicals are all very import-dependent, and their rising costs would nullify the impact of the devaluation on their ability to sell more cheaply in export markets.

•Risk of depreciation of rupee to Corporate Houses – Corporate houses in India had forex debt outstanding of over US$ 200 billion on March 2013 and only half of this forex debt is hedged. This has made the foreign debts more expensive than the Rupee loans.

IMPACT OF RUPEE DEPRECIATION


Greater volatility in stocks: Foreign funds have sold net $6.7 billion (largely from bonds) from May 22 to June 24, 2013. The BSE Sensex has fallen nearly 8 per cent over the same period.

Higher fuel price: Petrol prices have been hiked many times. Such hikes has become a recurring feature. Crude, which is priced in dollars, is India's biggest import item and a depreciating rupee increases the cost of imports. The worst part is Indians have to pay more for fuel even though global prices have hit a year-low.

Corporate profits: Exporters have gained, but companies dependent on imported raw materials have seen a sharp impact on their bottom line. A weak rupee also exposes companies with unhedged overseas loans.

IMPACT OF RUPEE DEPRECIATION


MEASURES TAKEN TO CURB RUPEE FALL

•Toughens rules for derivative trading in currency markets-Regulators toughened rules for derivatives trading in the currency market in a order to check the steep decline of the Indian rupee. The RBI restricted banks from proprietary trading in domestic currency futures.

•RBI directs OMCs to buy dollars from single PSB.- With the rupee depreciating sharply against the US dollar, the RBI ordered state-owned oil companies (OMCs) to purchase their dollar requirements from single public sector bank to curb volatility in the currency. State oil-refiners, who are biggest dollar guzzlers, agreed to implement the RBI order with immediate effect. The OMCs were even willing to accept RBI selling dollars directly to them through a single window.


•RBI eases overseas borrowing norms for firms. – The Reserve Bank of India eased norms for non-bank asset finance companies to raise debt from beyond the borders by allowing them to raise such funds through the automatic route as against the approval route earlier, in a step aimed at improving dollar supply amid a weakening rupee.

• Relaxing of FDI - The government has changed FDI limits in as many as 12 sectors. The Government liberalised FDI limits in twelve sectors, including telecom and defence. Paving way for fresh investments in telecom companies, the government cleared 100 per cent FDI in telecom sector. To boost the sagging economy, the government also raised FDI in defence sector from 26 per cent to 100 per cent. But the hike comes with some conditions.




•RBI Tightens Liquidity - The Reserve Bank of India (RBI) announced measures to curb the rupee’s decline by tightening liquidity and making it costlier for banks to borrow funds from the RBI.

•RBI extends restriction on co-operative banks for loan against gold coins. - The Reserve Bank of India has extended the restriction on advance against gold on co-operative banks as well, a move to curb the demand for gold.

•Import Duty on Gold increased to 10% - The government increased the customs duty to 10% from 8% on the yellow metal, a move that helped the rupee edge up against the dollar but will make the commodity costlier by about Rs 600/10 gram.


FINDINGS

•Providing huge subsidies inspite of rising fiscal deficit - The government allowed subsidies to burgeon, as rising oil prices were not passed on to consumers The end result was a huge subsidy bill taking up the fiscal deficit by 300 bps.

• Too much dependence on forex reserves - The illusion of high foreign exchange reserves made policymakers ignore a potential spike in Current Account Deficit (CAD). India’s foreign exchange reserves plummeted by 12.5 percent. Further, CAD increased to 5 percent of GDP over the last few years.

•Growth was given priority over inflation. - Prioritising growth over inflation further depreciated the rupee.


CONCLUSION

The Rupee fall was primarily caused by overconfidence on growth, economic mismanagement, bureaucracy, corruption, weak infrastructure and faulty decisions of the policymakers.

However, after the great rupee fall the RBI took some corrective measures. RBI toughened derivative trading in currency markets, eased foreign borrowing norms on firms and reduced liquidity adjustment facility. This measures turned out be fruitful and the rupee posted biggest single- day rise in 15 years as it soared by 225 paise to end at Rs.66.55 against dollar on 29th August 2013. Since, then the rupee has been rising. In fact, it touched 59.77against dollar on 02-04-2014. It is expected to continue to this rising trend in the coming months as well.


Limitations are an inherent part of any study. The proposed study suffers from the following limitations –

•The basis of the project has been Secondary data. If primary data would have been used a more descriptive analysis could have been done.

•The impact of the depreciating rupee on only the Balance of Payments and on the corporate sector having External Commercial Borrowings has only been considered.

•For the purpose of the study, only one foreign currency (i.e US Dollar) has been considered.

LIMITATIONS OF THE STUDY


Thank You…

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