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INTRODUCTION:
Rupee has been continuing with its downward trend since a couple of weeks.
Moving from bad to worse, The Finance Ministry, however, believes that the
unwarranted panic in the market will settle down in some time. Chief
economic adviser Raghuram Rajan, too, is of the opinion that weakness in
rupee could be a temporary phenomenon.
INDIAN RUPEE has been depreciating against U.S Dollar, but the year 2013 has
seen its maximum depreciation.The Indian rupee touched a lifetime low of
68.85 against the US dollar on August 28, 2013. The rupee plunged by 3.7
percent on the day in its biggest single-day percentage fall in more than two
decades. Since January 2013, the rupee has lost more than 20 percent of its
value, the biggest loser among the Asian currencies.
rupee. Since the early nineties, when Indias foreign exchange reserve was
near zero, India has steadily built up its foreign exchange reserve, which is
in hundreds of billions of dollars. The Reserve Bank of India normally uses
this to ensure there is no undue turbulence in the value of the rupee.
31.37 against a dollar. The rupee traded in the range of 40-50 between
2000 and 2010.
It was mostly at around 45 against a dollar. It touched a high of 39 in 2007.
The Indian currency has gradually depreciated since the global 2008
economic crisis.
Liberalising the currency regime led to a sharp jump in foreign investment
inflows and boosted the economic growth.
the USD INR history summaryThis is the US Dollar (USD) to Indian Rupee
(INR) exchange rate history summary page, detailing 180 days of USD INR
historical data from Thursday 21/03/2013 to Saturday 14/09/2013
Highest: 67.9576 INR on 28 Aug 2013.
Average: 58.4158 INR over this period.
Lowest: 53.6573 INR on 01 May 2013.
CAUSES
Higher Inflation
Increase in import prices of essential commodities such as crude oil,
fertilizer, pulses, edible oils, coal and other industrial raw materials
are bound to increase the prices of the final goods. Thereby making it
costlier for the consumers and hence inflation might be pushed up
further.
Prices of Crude oil
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.
Volatility in the equity market
The equity markets in India have been volatile for a certain period of
time. This has put the FIIs into a dilemma as to whether they should
be investing in India or not. In recent times their investments have
touched an unprecedented level and so if they pull out then the
inflow will go down as well. Exchange rate risk also drives away
foreign investors which in turn depreciates the local currency.
Poor current account deficit
One of the main reasons behind the Indian governments inability to
arrest the fall of the national currency is the critical current account
deficit. 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.
Increase in the Import Bill
Depreciation of the local currency results in higher import costs for
the country. Failure of a similar rise being experienced in the prices
of exportable commodities is going to result in a widening of current
account deficit of the country. Indias import bill has been going up
of late and most of this can be attributed to gold. This has also
hampered Indias efforts to arrest the slide of the INR. Gold alone
takes up more than 10 per cent of Indias import bill
RBI can sell forex reserves and buy Indian Rupee 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.
Increase in Cost of Borrowings
IMPACTS
Primarily the consequences of weak rupee are to be felt
through:
A. Increase in the Import Bill
A depreciation of the local currency results in higher import costs for the
country. Failure of a similar rise being experienced in the prices of exportable
commodities is going to result in a widening of current account deficit of the
country.
B. Higher Inflation
Increase in import prices of essential commodities such as crude oil, fertilizer,
pulses, edible oils, coal and other industrial raw materials are bound to
increase the prices of the final goods. Thereby making it costlier for the
consumers and hence inflation might be pushed up further.
C. Fiscal Slippage
The central government fiscal burden might increase as the hike in the prices
of imported crude oil and fertilizer might warrant for a higher subsidy provision
to be made for these commodities.
D. Increase in Cost of Borrowings
Interest rate differentials in domestic and global markets encourage the
industry to raise money through foreign markets however a fall in the rupee
value would negate the benefits of doing so. The next two sections of the
study assess the impact of rupee depreciation on the:
Import Bill of the Country
Import of Key Commodities
Fertilizer
Thermal Coal
Vegetable Oil
Crude Oil
and Industry of India, sectors like petroleum and petroleum products, drugs
and pharmaceuticals and engineering goods which have import inputs of
as much as 77 percent, 19 percent and 21 percent, respectively will gain if
the rupee appreciates. They would have to pay less for the imported raw
materials which would increase their profit margins.
Likewise, a depreciating rupee makes exports cheaper and imports
expensive. So, it is good news for industries such as IT, textiles, hotels and
tourism which generate income mainly from exporting their products or
services. Rupee depreciation makes Indian goods and services cheaper for
overseas buyers, thus leading to increases in demand and higher revenue
generation. The foreign tourists would find it cost effective to come to
India, therefore increasing the business of hotel, tours and travel
companies.
Indias IT sector is dependent on foreign clients, especially the United
States, for more than 70 percent of its revenue. When an IT company gets a
project from a client, it pre-decides on the length of the contract and the
cost of the project. The contracts with U.S. clients are usually quoted in U.S.
dollar terms. So, the fluctuation in the exchange rate can bring about a
considerable difference in the performance of a company.
Some companies undertake a range of measures like hedging exchange
risks using forwards and futures contracts. This helps in mitigating some of
the losses due to exchange rate fluctuations, but none-the-less the impact
is substantial.
The exchange rate is a significant tool that can be used to examine many
key industries; with fluctuations potentially having a serious impact on the
economy, industries, companies, and foreign investors. Rupee appreciation
is generally helpful for industries which rely closely on imported inputs
while depreciation of the rupee is welcome news for industries which are
exporting a majority of their products.
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.
Students studying abroad: Students who are studying abroad will bear the
brunt most owing to depreciating rupee.
Countrys fiscal health: 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 is bound to pose a threat to the growth of overall economy.
Tourism: The depreciating rupee will surely be a dampener if you are
planning your holiday abroad. Your travel charges as well as hotel
charges will escalate drastically, let alone shopping and other
miscellaneous spending activity.
Transported Goods: Take, for example, crude oil. A weak rupee will lead
to higher import prices. Since petrol is fully and diesel partially
decontrolled, oil marketing companies such as IOC and BPCL are free to
hike their retail prices in tandem with the import-linked prices. Once the
prices of both fuels increase progressively at the filling stations, it is
followed by a cascading impact that is manifested in the form of an
increase in transportation costs, leading to higher prices of goods that
are transported from one part of the country to another, such as food,
consumer durables and fast-moving consumer goods.
IMPACT ON BUSINESS :
The fast depreciating rupee has hit hard Indian auto companies raising sharply
import costs in a market which is already under pressure from a continuous
slide in vehicle sales over the last seven months.
Consumer companies are also hit by the deprecating rupee due to their
dependence on imported and crude oil linked raw materials
While the recent rupee depreciation against dollar may have brought some
cheer for yarn exporters, the industry players are pushing for export orders to
make the most of the situation. This depreciation may prove beneficial to
Indian IT companies and other exporters. But this benefit depends on global
demand and several other factors also. While this declining value may turn
beneficial for exporters but this is surely is putting a pressure on imports and
consumers.
SOURCE: http://www.nationalturk.com/en/depreciation-of-indian-rupee-canaffect-indias-economy-indian-pm-42284
MEASURES
1. Measures By RBI:
a. Using 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
pointed out early this year that our fiscal deficit and inflation were among
the highest in emerging markets. Our dependence on hot FII portfolio
money was always there for all to see.
Our government, the markets and the rupee hid behind a huge wall of
liquidity in the global markets. Looking back, it almost seems as though
the RBI commenced its interest reduction cycle a bit too early and the
outgoing governor did not wish to leave without correcting what he may
believe was an error in policy judgment.
The fall in the rupee is a mere manifestation of the deeper malaise
high inflation, low interest rates combined with low growth.
The root of the problem lies in the consistently negative rate of interest
imposed on savers. An open economy has its own ways of correcting
artificial imbalances created by its policymakers. Negative real interest
rates will almost always break out into currency depreciation. When this
happens, no amount of intervention can help till the currency finds its
right level.
Holding on to negative real interest rates for a long time has driven
household savers into non-financial assets in India, that means gold.
To begin with, there needs to be a true gold alternative. In the past few
years, gold ETFs and loans added to its liquidity. Banks and PSUs
pushed gold coins to cash in on the craze. Buying gold in India is as
easy as buying a bar of chocolate.
Inflation-linked bonds can never be successful as an alternative to gold
unless the government is courageous enough to give post-tax inflationlinked real returns. At the same time, gold loans and ETFs should be
made inaccessible.
Its time to also go back grovelling to the NRIs hoping that they will
return for the premiums over international dollar interest rates.
Also, shouldnt we open up incoming FDI for all sectors, except those
considered sensitive to national interests? Especially for infrastructure,
capital-intensive and environmentally safe projects. One would rather
approve outgoing FDI on a case-by- case basis ensuring that, like in the
case of China, they are in national strategic interest.
utopian.
The other day, a friend told me that it was easier to import than
transport in India and there lies the real solution in the long run. Our
manufacturing sector has to grow aggressively and has to be provided
with enabling infrastructure. India needs to promote its own economic
union with the goods and services tax. We spend an estimated $25
billion on defence imports; after 60 years we surely can do something to
substitute this.
While NREGA and food security can be justified, inflation led by fiscal
deficit has to be controlled by eliminating indirect subsidies and freeing
up agricultural trade. To revive the rupee, we need to rein in the twin
deficits. At the same time, painful as it may seem, we need to hold on to
interest rates at a real level to encourage household savings.
Most importantly, we need a majority government with a clear mandate
for development. For now, India will have hold on till the next elections.
SOURCE: http://blogs.reuters.com/india-expertzone/2013/08/23/how-torescue-the-falling-rupee/