Rupee Depreciation

By

V.Chaitanya Lakshmi

ContentsFactorsImpactSuggestions

Balance of Payments

Current Account Deficit: If total inflows in the country (its export, remittances and earning from its investments abroad) is less than its outflows (its import, remittances out of the country, payments of interests etc.)

India recorded a Current Account deficit of 21.80 USD Billion in the second quarter of 2013

Capital Account :This records all the flow (into or out of the country) made for future return –FII or FDI. It also includes loans taken from abroad (which actually is investment by foreign lender into the nation

A country is said to be in Capital account surplus if total inflows into the country (FII, FDI and borrowing from foreign companies/banks) exceeds total outflows (investments into foreign countries and lending to foreign countries or companies). In case situation is reversed, country has capital account deficit.

Trade deficit & Fiscal deficitIf Exports of a country > Imports of the

country then it is called trade deficit.India recorded a trade deficit of 430.98 INR Billion in

September of 2013If government's total expenditures is more

than the revenue that it generates then it is called Fiscal deficit

High imports

Demand & supply of currencyWhen a country imports more are more than exports, it

means it is paying more than it is making in terms of the currency in which it is trading. (paying more dollars than we are making)

This difference to be paid in terms of foreign currency has to be purchased from the market where the basic principles of demand and supply determine the price of the currency

It means that the foreign exchange market has an excess supply of rupees and a shortfall of dollars, causing the country’s currency to depreciate as demand of its currency decreases. This leads to the rupee losing value against the dollar

We pay dollars for importing oil and gold, The government of India subsidizes the prices of diesel,LPG , kerosene, etc.

This means that the oil companies have to sell these products at a loss, to the consumer. The government in turn compensates these companies for the loss. This leads to the expenditure of the government going up and hence it incurs a higher fiscal deficit(government's total expenditures exceed the revenue that it generates).

Rupee losing value(Rupee depreciation)

Indian co’s have to pay

more/per barrel of oil in rupees

Higher oil bill

Increased subsidy on the govt

Higher fiscal deficit

Higher trade deficit

Capital InflowsMovement of capital

into a market or economy

Capital inflows Currency appreciation

Capital outflows Currency Depreciation

FII and FDIFII is when foreign investors invest in the

shares of a company that is listed in India, or in bonds offered by an Indian company.

For ex: If a foreign investor buys shares in Infosys then that qualifies as FII Investment.

FDI is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India.IBM India is a wholly owned subsidiary of IBM

The uncertainty & delay in our commitment to economic reforms, retrospective taxes, and policy paralysis within the government have created a fear in mind set of global investor resulting into decline of foreign Investment.

The loss in value of the Indian currency has further accentuated FIIs withdrawals.

Flaws in foreign currency management of India, it attracted investments of FII rather than that of FDI.

FII’s are taking their investments out of the Indian markets, it has led to an increased demand for dollars, further leading to a spiraling rupee.  

Interest ratesUncontrolled money borrowing from abroad.  The interest rate for the loan from abroad is less.Central

government allowed industrialists to take huge sum of loans from abroad

 Industrialists took loans in foreign currencies at cheap rates ( $100m @ Rs40, 2008 rates) and when they have to repay in say 2013 then, $100 m @ Rs 62 is very expensive. Hence a loss for Indian companies. 

When industrialists accumulate money from Indian markets for the repayments, the demand of Dollar is getting increased further and which will cause the decline the value of Rupee

InflationHigh inflation in a country

impacts the country’s exports as goods become expensive for other countries resulting decreased exports, leading to decrease in demand for currency and depreciating currency value.

Infrastructure: lack of proper infrastructure in India

Daily meals becoming costlier with inflation

Forex reserves

The fundamental driving the rupee movement is ultimately the change in foreign exchange reserves - decline in the forex reserves would result in depreciation of the currency. Foreign currency assets after increasing in the months of March and April 2013 declined to $ 258.50 billion in May 2013

The RBI can directly intervene in the forex market to curb falling exchange rate through dollar selling.

SpeculationThe 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.

Market sentiments

During turbulent markets, investors usually prefer to park their money in safe havens such as US treasuries, Swiss franc, gold and so on to avoid losses to their portfolios. This flight to safety would lead to foreign investors redeeming their investments from India. This could increase the demand for dollar vis-à-vis Indian rupees.

Policy inaction: Perception of lack of clarity on the policy front is also fanning speculative demand wherein the Reserve Bank of India (RBI) on one day said it will tighten liquidity and on yet another said it will inject $1 billion in the market.

Euro zone crisis had lead to fall in exports in IndiaRecession in developed countries like US made big institutions to

pull out their moneyEuropean Union (EU) is the biggest partner of India in the foreign

trading sector.  India, more than any other countries, has been depending EU for the investments.  Therefore, it is quiet natural that the recession and crisis connected with EU will adversely impact India.

Dollar is getting stronger against all other currencies of the world. This is also another reason for the plight of Rupee.  The shadow of global recession is moved away and the situation in America, even in employment sector, is getting improved nowadays.  This is the secret behind the strength of Dollar,besides the issues in Japan and Euro zone are still going on.  Therefore, Dollar, like gold, became the most secured investment method.  In the global money market, the investments in Euro and other currencies have been shifted to Dollar.

Global factors

US tampering the stimulus

US Fed has shown signs to end their stimulus. Hence, making the US dollar stronger against the other currencies including the Indian rupee, at least in the short term. One doesn’t really know when Helicopter Ben will shut the door and stop the printing of money, though one doubts whether the door will be shut anytime soon.

Political factorsPolitical instabilityDelay in implementation of policiesDelay in sanctioning budgetBiased decisions for the sake of winning

elections(Food security bill)The value of Rupee is adversely impacted even by

the uncontrolled subsidies given to the super industrialists.  If the authorities are reluctant in solving these issues, it will be more serious crises that are going to overwhelm the country

lack of reforms and policy paralysisScandals & Corruption

ImpactIncrease in Inflation, Fuel price: A weak rupee will increase the burden of

Oil Marketing Companies (OMCs) and this will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation.

Increase in the cost of education  Economic slowdown and job lossLoan rates go upImporters sells rupees and buy dollars, high purchase of dollars more

depreciation in rupeeImported goods: Buying imported stuff will become a very costly affair. You

will have to shell out extra on imported goods.

SuggestionsExports should be encouragedImports of all non-essential items should be imposed with high

import dutiesCreate a conducive environment for manufacturing and

infrastructureCapital controls implemented should be removed and free trade

environment should be createdGold lying in the lockers of Indians should be brought out by

introducing attractive schemes and should be used for investment

Exporters Should Buy Rupees Moral InfluenceDelay Import Payments

  To Provide Oil Bonds Review limits for foreign investmentOpting for currency swaps and batter exchanges with

friendly nations like Japan and Iran on both sides of our country

Speedy approval to over 100 coal mines that are awaiting environmental clearances

Implement a commercially viable gas price policy to maximize gas output within the country

Have proper crop planning so that surplus produce don’t get rot

Transparency between the central bank and the markets

Queries….???