INDIAN RUPEE CRISIS OF 2013

Introduction

The June 2013 announcement of Quantitative Easing (QE) tapering by the Federal Reserve Bank of
USA triggered huge capital outflows from emerging markets resulting in turmoil in financial markets
around the world. Soon India joined the set of fragile economies such as South Africa, Russia, Brazil,
Indonesia, Argentina and Turkey facing capital outflows and depreciating currencies.
On Aug.28, 2013 the Indian Rupee (INR) depreciated to its all-time low of Rs.68.845 per USD. INR
had depreciated by 20% from the beginning of the year and by 13.7% during June Aug.20131. With
this kind of depreciation of INR, market analysts and international investors were left wondering if
India growth story was dead. The current crisis was reminiscent of the Balance of Payment crisis
that India had faced in early 1990s. Has India come full circle to the crisis of 1990s after successful
economic liberalization programme since the crisis? What went wrong? Where is the INR headed?
Has the market over reacted? These are the questions for which market observers, investors and
policy makers were looking for answers.
Background

India was a relatively closed economy until 1990-91 when India faced severe Balance of Payment
(BoP) crisis. Following this crisis India embarked on a reform programme which liberalized her
economy both internally and externally. This resulted in increased growth during the post-reform
period from an average annual growth rate of 5.51% in 1980s to 5.87% during 1992-2003 (see Exhibit
1). During 2003-8, India witnessed spectacular growth of around to 9%. India growth story became
a buzz word among investors and Indian policy makers alike. As subprime crisis hit the western
world, India was not spared either with GDP growth faltering 6.7% during 2008-9 (see Exhibit 2).
There was a quick recovery as GDP growth rose to 8.6% and 9.3% during 2009-10 and 2010-11
respectively. However growth recovery proved short lived. Inflation surged along with growth
recovery prompting RBI to implement contractionary monetary policy. Towards the end of 2011
things had turned gloomy once again for India. Situation turned for the worse in 2012- 2013. The
announcement of QE tapering accentuated the problem threatening a full blown BoP crisis.
Post-Independence India

In the years following her independence in 1947, India followed a policy of inward-looking selfreliant approach to economic growth. Major policy mechanism aiding this approach was Five Year
Plans which began with the establishment of Planning Commission in 1950. Indias approach to
economic development was guided by Indias first Prime Minister Jawaharlal Nehru, who continued
till 1964. Nehru was Fabian socialist who was impressed by the rise of Russia as an economic power
through central planning approach after the Bolshevik Revolution of 1917. Indias economic policies
were characterized by strong role for the public sector. Many of the industries were exclusively
reserved for the public sector. While India made progress in science and technology, the economic
growth rate continued to be low with average GDP growth rate of 3.5% from 1950-1980. Economic
policies prior to 1991 is summarized below.
Industrial Policy

Large industries were required to obtain license from the central govt. for expansion, setting up new
units or even for product diversification. Monopolies and Restrictive Trade Practices Act (MRTP)
1

Ali Syed Ashraf, Sliding Indian rupee: Causes and consequences, Financial Express, Sept 8, 2013.
http://www.thefinancialexpress-bd.com/old/index.php?ref=MjBfMDlfMDhfMTNfMV85Ml8xODI1OTc%3D, accessed on
Mar 16, 2014.

regulated industries with asset bases of more than INR10 million. The objective was to prevent
concentration of economic power in the hands of few industrialists. Basic and heavy industries were
reserved for investment by Public Sector Enterprises (PSEs). These included Steel, Oil, Minerals,
Power, and Telecommunications etc. Foreign Direct Investment (FDI) was restricted to 40% of
equity. There were restrictions on Indian companies entering into collaboration with overseas
companies for technology transfer.
Trade Policy

Imports were generally under license except for the ones under Open General License. Peak rate of
customs duty was at 300% in 1991. Such restrictions were necessary as INR was kept overvalued to
keep the cost of imported capital goods cheaper. Objective of self-reliance meant that local industries
had to be protected through tariffs and quotas.
Financial Sector

With two rounds of nationalization of banks in 1969 and 1980, the banking sector was controlled by
public sector banks. Interest rates were regulated by the central bank. In addition to Cash Reserves
Ratio to be kept with RBI, commercial banks were required to have 38% of their assets in the form of
govt. securities under the Statutory Liquidity Ratio (SLR) requirement in 1991. SLR helped fund
large budget deficits at low interest rates. Restrictions on asset portfolio meant that private sector
would get loans at high interest rates and the spread between the deposit interest rate and loan interest
rates were very high. Indian equity and debt market were not open to foreign investors.
Fiscal Policy

Fiscal policy prior to crisis was expansionary with average fiscal deficit during 1985/86 to 1989/90 at
10.1% of GDP and primary deficit at 7.5%. Corresponding ratios for 1980/81 to 1984/85 were at 8%
and 6.8% respectively2. Excessive public spending caused high inflation by the end of 1980s.
1990-91 Economic Crisis

Annual inflation as measured by CPI during 1990-91 was 13.6% compared to 6.6% in 1989-903. Rise
in oil prices due to Gulf war, falling exports and loss of remittances arising out of Gulf crisis resulted
in worsening of BoP situation. India was facing twin deficits of fiscal deficit and BoP current account
deficit. Foreign exchange reserves stood at approximately USD 4 billion at end of March 19904. India
had to take loan from IMF from including loan of USD 1786 million in Jan 1991 form Compensatory
and Contingent Financing Facility (CCFF).

Indias Economic Reform

Economic reform programme began with devaluation of Rupee to in July 1991 to correct BoP current
account deficit. India pledged to cut the fiscal deficit from 8.4% (1990-91) to 6.5% in 1991-92. This
was coupled with restrictive monetary policy. These were expenditure reducing and expenditure
switching policies aimed at cutting the BoP current account deficit.
Simultaneously structural reforms were implemented with a view to liberalize the economy and
integrate the economy with rest of the world. Structural reforms involved de-licensing of industries,
removal of reservation of industries for public sector, and disinvestment of Public Sector Enterprises,
2
Vijay Joshi and I.M.D.Little, India, Macroeconomics and Political Economy 1964-1991, The World Bank, Washington
D.C., 1994, pg.181.
3
Ministry of Finance, Govt. of India, Economic Survey 2012-13.
4
Ibid

reduction in barriers to foreign investment, reduction in trade barriers, financial sector deregulation
including licenses for private sector banks, interest rate deregulation, and reduction in reserve ratios.
Structural reforms continued as India adopted a gradualist approach to reforms rather than big bang
approach. For instance, even by 2013 India allowed only 51% foreign ownership in multi-brand
retailing that too subject to approval of state governments for such FDI.
Indias Exchange Rate Reforms

From the 1970s to March 1, 1992, India was under a fixed exchange rate regime. The exchange rate
was decided by the central bank, RBI. The rate was adjusted in relation to a basket of currencies.
Following the BoP crisis, in July 1991 INR was devalued by about 22% vis--vis USD. This was
followed in March 1992 with partial floatation of INR and a dual exchange rate system came into
existence. On March 1, 1993, the dual exchange rate was abolished in favour of one unified market
determined exchange rate. Since then all foreign exchange transactions take place at exchange rates
determined by the forces of demand and supply. However, RBI intervenes periodically to regulate the
market. Thus, the current system is a managed float. Behaviour of Rupee since the exchange rate
reforms is in Exhibit 6.
Liberalization of Capital Flows

India debated to move to capital account convertibility in mid 1990s after making it fully convertible
on current account in 1994. However, series of crisis in emerging markets in 1990s made India put
this idea on back burner. India liberalized capital flows gradually over time and made INR partially
convertible on capital account. FDI is permitted under automatic route subject to the caps in different
sectors, in some cases 100% FDI is permitted, in other cases this may range from prohibition of FDI
investment to 24%, 49% or 74% cap on FDI investment (see Exhibit 12). India opened up for
portfolio investment but only qualified foreign institutional investors (FIIs) are allowed to invest in
Indian equity market subject to caps on the extent of equity holding of such investors (see Exhibit 13).
Similarly there are restrictions on participation of FIIs in the govt. bond market and corporate bond
market, overseas borrowings by Indian corporates and banks. These measures have been introduced
gradually and the limit expanded over time. Thus India has followed gradualist approach to capital
account liberalization. The IMF also backed Indias capital control measure saying that strong capital
flows pose a key challenge to Indias growth prospects.
"Directors observed that low yields in advanced economies and India's favourable growth
differentials could raise capital inflows above its absorptive capacity While exchange rate
flexibility would remain the first line of defense, reserve accumulation and macro-prudential
measures could be employed if strong inflows continue." 5
Despite gradual and controlled deregulation of capital flows, India became more vulnerable to capital
flow reversals as outstanding portfolio investment and short term debt have risen over time.
Why Has The Rupee Weakened?
External Factors

Some observers were of the opinion that the situation in 2013 was not just India-centric problem but
more of an emerging market phenomenon.
Clearly, emerging markets across have been reeling under the kind of currency pressure with
the dollar strengthening. So that is going to definitely continue," said Arindam Ghosh, CEO,
BlackRidge Capital Advisors.6
5

The Indian Express, Jan 07, 2011.

http://archive.indianexpress.com/news/imf-backs-capital-controls-in-brazil-india/734569/, accessed on Mar 16, 2014.
6
The Economic Times, Aug.28, 2013.

Bloomberg estimated that about USD3.9 trillion has been invested in emerging markets between 2009
and 2013. Bloomberg said that as the Fed announced tapering of QE, cash invested in emerging
markets started reversing.7 10-year Govt. bond yields (see Exhibit 4) in USA and India during 2013
gives important economic indication. The difference in yields narrowed in 2013 as US economy
showed signs of recovery and Fed announced QE tapering. Currencies of some of emerging markets
came under pressure as capital flew out (see Exhibits 8 and 9). There was net outflow (see Exhibit 10)
of debt and equity from Indian markets during June Aug. 2013 triggering declines of INR.
Weak Balance of Payments, Rising Inflation and Economic Slow Down

Indias BoP statistics (see Exhibit 5) during 2007-8 to 2012-13, showed steady deterioration of
Current a/c balance over the years and in particular in 2011-12 and 2012-13. In 2011-12, there was an
overall BoP deficit resulting loss of foreign exchange reserves. Addition to foreign exchange reserves
is also very marginal after the subprime crisis, even as current a/c deficit (CAD) increased rapidly.
Moreover, the CAD has been financed mainly by non-FDI capital inflows which may exhibit sharp
trend reversals. This raised questions about the sustainability of CAD and ability of RBI to defend the
exchange rate amidst capital flow reversals.
The deteriorating BoP led some observers to believe that India has to blame herself for the current
predicament in foreign exchange market.
"The problems are fundamental and our policy makers do not seem to realize the basic
problem which is the huge deficit on current account and over dependence on capital inflows.
Nobody can live forever on somebody else's money," said forex market expert, AV Rajwade8.
Inflation (Consumer Price Index based) which has been high since 2008-9 (see Exhibit 2), steadily ate
into competitiveness of Indias exports as nominal exchange rate remained stable during 2008-12 (see
exhibit 6). Economic growth also exhibited considerable slow down since 2011-12 (see Exhibit 2).
One of the contributory factors to inflation was the large fiscal deficit (see Exhibit 1) which was the
result of fiscal stimulus implemented by the Indian govt. after the economic slowdown that hit the
country following the subprime crisis.
Policy Paralysis?

The United Progressive Alliance (UPA) had successfully got second term in 2008 elections after
running full term in its first stint from 2003-8. The multi-party coalition was becoming a bottleneck in
implementing much needed economic reforms. Several reform bills were pending with the
government and could not be implemented due to pressure from alliance partners. On the other hand
fiscal deficit had gone very high following the fiscal stimulus package implemented as a response to
the 2008 crisis. Administered prices and subsidies in the food, fertilizer and petroleum sectors had
resulted in widening fiscal deficit and bringing down these was a difficult political exercise given the
coalition politics and elections in the state governments such as Uttar Pradesh and West Bengal.
Besides, the govt. was under relentless attack from the opposition parties on corruption related issues,
the major one being the telecom 2G spectrum scam. The slow reforms were termed by newspapers as
policy paralysis. Leading newspaper, Times of India carried story under the head line End Policy
Paralysis: India Inc in which it said that Indian corporate sector had urged the government to speed
http://articles.economictimes.indiatimes.com/2013-08-28/news/41538716_1_asian-equity-markets-indian-rupee-freshall-time-low, accessed on Feb 8, 2014.
7
Bloomberg Aug 20, 2013
http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html,
accessed on Feb 25, 2014.
8
NDTV, Jul 9, 2013.
http://profit.ndtv.com/news/forex/article-why-the-rupee-may-fall-to-70-against-dollar-324232, accessed on Feb 25, 2014.

up stalled economic reforms, warning that policy paralysis threatened to derail the India growth
story9
The ruling party sought to dispel the fears of policy paralysis. Instead the govt. blamed the external
situation arising out of the European debt crisis for Indias slower growth.
We should not forget that we have achieved almost 9% growth every year with the same
policy paralysis. Let India Inc give an analysis for it first, then we will think about what
policy they are saying," Congress party spokesperson Renuka Chaudhary said.10 She added
that India had managed well amidst crisis.
Reacting to the criticism of policy paralysis, the then Finance Minister, Pranab Mukherjee contended
that govt. had undertaken several policy reforms. But he conceded that it a multiparty coalition had
delayed reforms:
"There is no question of policy paralysis in New Delhi. I do not agree with them.
People will have to be on board and in order to have them on board we shall have to persuade
them, we shall have to carry dialogue and discussions with them. This is the only way through
which we build up consensus."11
Indian industry did not appear to be convinced with governments defense and argued for
implementation of structural reforms. As sample of such reactions is given below:
Indias slump is worse than elsewhere in Asia because the country has failed to carry out
long-overdue structural changes to the economy, said Indranil Pan, chief economist at Kotak
Mahindra Bank.12
"Unless reforms related to growth and lowering the current account deficit are addressed,
things will not improve," said Devendra Pant, Economist, India Ratings13. "The government
and RBI need to focus on reforms rather than short-term quick fixes (for the rupee)," said
Shubhada Rao, chief economist at Yes Bank. 14

Crisis of 1990s Revisited?

For some market players the ongoing weakness of Rupee was reminiscent of the crisis of 1990s and
they consider that risks have heightened now due to the progressive opening up of capital account.
The currency has weakened about 28 percent versus the dollar in the past two years, reviving
memories of the early 1990s crisis, when the government received an International Monetary
Fund loan as foreign reserves waned. - A story in Bloomberg15
9

Times of India, Nov.14, 2011.

http://timesofindia.indiatimes.com/business/india-business/End-policy-paralysis-India-Inc/articleshow/10719879.cms,
accessed on Mar 16, 2014.
10
Times of India, Nov.15, 2011.
http://timesofindia.indiatimes.com/india/Congress-dismisses-notions-of-policy-paralysis/articleshow/10733395.cms ,
accessed on Mar 16, 2014.
11
The Hindu, April 22, 2012.
http://www.thehindu.com/business/Economy/no-policy-paralysis-in-new-delhi-pranab/article3342569.ece, accessed on
Mar 16, 2014.
12
Bloomberg Aug.20, 2013.
http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html,
accessed on Feb 25, 2014.
13
Yahoo Singapore Finance, Aug.22, 2013.
http://sg.finance.yahoo.com/news/indias-rupee-skids-record-low-051443809.html, accessed on Feb 25, 2014.
14
Ibid.
15
Bloomberg Aug.20,2013.

Some felt that the situation was much worse now as Indian economy is more integrated with rest of
the world now than in the 1990s and hence more susceptible to global headwinds.
"In 1991, the global situation was relatively more reassuring. But, now, India's openness has
increased substantially. So, in that sense, any shock in the global economy will have a large
impact on the domestic sector. Hence, we are kind of worried about the balance of payments
despite numbers being relatively better than 1991" - Samiran Chakraborty, head of India
Research, Standard Chartered Bank.16
Future Outlook for INR

As INR breached Rs.64 level on Aug. 20, 2013, market expectation regarding INR-USD rate was very
varied (see Exhibit 11).
However, some players felt that Rupee had overshot its fundamentals.
"We continue to believe that fundamentally the rupee is undervalued and has overshot its
equilibrium level substantially, but as numerous episodes of past currency crises have amply
demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and
remain so for a long time, said a Deutsche Bank report17
But gloom set in on Aug.28, 2013 as INR touched crossed 68 mark against the Greenback the market
went into panic mode.
"It is just impossible to put any realistic value to the rupee anymore," said Uday Bhatt, a
forex dealer with UCO Bank18.
Others felt that depreciation of Rupee was just what the doctor had ordered.
"It is better for us to have a weaker currency than otherwise Why do we need a currency
below 60 to the dollar. We don't. But at the same time it's important that we do not let panic
prevail when the currency hits 68 or 70," says Manoj Rane, MD & Head Fixed Income &
Treasury-India, BNP Paribas.19
As confusion prevailed in the market over the future course of rupee, market players and analysts
wondered as to what went wrong with Indian economy? What are the causes of such a steep
depreciation of INR? Is it just the reflection of what was happening in other emerging markets?
Where is the INR headed from here? Has the INR overshot its fundamental value? The answers to
these questions were important for policy makers as well.

http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html,
accessed on Feb 25, 2014.
16
Ibid
17
NDTV Aug.21, 2013.
http://profit.ndtv.com/news/forex/article-indian-rupee-may-crash-to-70-per-dollar-in-a-month-deutsche-326087,
accessed on Feb 25, 2014.
18
The Indian Express, Aug.28, 2013.
http://indianexpress.com/article/business/business-others/indian-rupee-hurtles-lower-as-foreign-investors-flee/,
accessed on Feb 08, 2014.
19
The Economic Times, Nov. 04, 2013.
http://articles.economictimes.indiatimes.com/2013-11-04/news/43658895_1_treasury-risk-management-consultant-avrajwade-manoj-rane, accessed on Feb 25, 2014.

Exhibit 1: Indias GDP Growth Rate

Period

CAGR

1950-51 to 1980-81

3.56

1981-82 to 1991-92

5.51

1992-93 to 2002-03

5.87

2003-04 to 2008-09

8.97

2003-04 to 2010-11

8.45

Note:

1. Created by authors.
2. CAGR has been computed based on the GDP at factor cost (2003-4 prices).
Source: Database of Indian Economy-Reserve Bank of India, http://dbie.rbi.org.in/

Exhibit 2: Annual Percentage Change in Key Economic Indicators

Indicator

2007-8

2008-9

2009-10

2010-11

2011-12

2012-13

Real GDP growth

9.3

6.7

8.6

9.3

6.2

5.0

Inflation (CPI based)

6.2

9.1

12.4

10.4

8.4

10.21

Growth of M3 (Broad Money)

21.4

19.3

16.8

16

15.6

13.6

Growth of Imports (in USD)

35.5

20.7

-5

28.2

32.3

0.32

Growth of Exports (in USD)

29

13.6

-3.5

40.5

21.3

-1.8

Note: All figures for Financial Year April 1 to March 31.

Source: 1. Economic Survey 2011-12, http://indiabudget.nic.in/
2. Database of Indian Economy-Reserve Bank of India, http://dbie.rbi.org.in/

Exhibit 3: Major Economic Indicators of Indian Economy 2007-8 to 2012-13

Indicator

2008-9

2009-10

2010-11

2011-12

2012-13

1.

GDP at Market prices (Rs. billion)

56300.63

64778.27

77953.13

89749.47

100,281.18

2.

Broad Money (M3) (Rs. Billion)#

47947.75

56026.98

65041.16

73648.37

83820.24

3.

GDS/GDP ratio

32

33.7

33.7

31.3

30.1

4.

GDI/GDP ratio

34.3

36.3

36.5

36.4

34.7

5.

Fiscal deficit/ GDP ratio

6.0

6.5

4.8

5.7

4.9

6.

Total Foreign Exchange Reserves

(million USD)#
Total Foreign Exchange Reserves (Rs.
Billion)#
Long Term External Debt (million
USD)#
Short term External Debt (million
USD)#

251985

279057

304818

294398

292046

12838.65

12596.65

13610.13

15061.30

15884.20

181,185

208,606

2,40,871

2,67,319

2,93,350

43,313

52,329

64,990

78,179

96,697

10. Total External Debt (million USD)#

224,498

260,935

305,861

345,498

3,90,048*

11. Outstanding portfolio investment in

India (million USD)

83210.56

138577.31

167338.82

181472.76

7.
8.
9.

Note:

1. # End March of the financial year.

2. *Out of this USD 172,346 m had a residual maturity of 1 year or less
Source: 1. Reserve Bank of India,
http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPREXD21860613.pdf (for indicators 1, 2, 6-10)
2. Planning commission of India,
http://planningcommission.nic.in/data/datatable/1203/table_1.pdf (for indicators 3-5)

192223.05

Exhibit 4: Ten-year US and Indian Govt. Bond Yields and Yield Differential
10
9
8
7
6
5

USA

India

differential

2
1
0

Note: Graph and calculations by authors.

Source: Thomson Reuters Eikon database.

Exhibit 5: Indias BoP Statistics (Net USD million)

Item

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

-195,656

-189759

-130593

-118374

-118,650

-91,467

107,493

111604

84647

79991

89,923

75,731

64,915

64098

48816

35726

49,631

38,853

A. CURRENT ACCOUNT
I. MERCHANDISE
II. INVISIBLES (a+b+c)
a) Services
b) Transfers

64,034

63494

53140

52305

44,798

41,945

-21,455

-15988

-17309

-8040

-4,507

-5,068

-88,163

-78155

-45945

-38383

-28,728

-15,737

46,711

39231

39652

51167

3,467

43,326

a) Foreign Direct Investment

19,819

22061

9360

18771

17,498

15,893

b) Portfolio Investment

26,891

17170

30293

32396

-14,030

27,433

31,124

19307

28437

13259

8,669

40,653

982

2296

4941

2893

2,637

2,114

8,485

10344

12506

2808

7,941

22,609

21,657

6668

10990

7558

-1,909

15,930

16,570

16226

4962

2084

-3,245

11,759

-58

-79

-68

-97

-100

-122

5. Other Capital

-5,047

-6929

-10994

-13016

-1,545

10,969

Total Capital Account (1 to 5)

89,300

67755

61989

53397

7,246

106,585

c) Income
Total Current Account (I+II)
B. CAPITAL ACCOUNT
1. Foreign Investment (a+b)

2.Loans (a+b+c)
a) External Assistance
b) Commercial Borrowings
(medium and long term)
c) Short Term To India
3. Banking Capital (a+b)
4. Rupee Debt Service

C. Errors & Omissions

2,689

-2432

-2993

-1573

1,401

1,316

D. Overall Balance (A+B+C)

3,826

-12831

13050

13441

-20,080

92,164

E. Foreign Exchange Reserves

-3,826

12831

-13050

-13441

20,080

-92,164

Source: RBI various press releases on Balance of Payments

10

Exhibit 6: Historical Trends in Indias Exchange Rate, Consumer Price Index and US Consumer Price
Index: 1990-2010
Year

Exchange rate
INR/USD

India CPI (IW)

(2001=100)

US CPI
(2001=100)

1990

17.5

41.67

74.35

1991

22.69

47.28

77.41

1992

25.92

51.81

79.65

1993

31.44

55.7

81.9

1994

31.37

61.31

83.92

1995

32.42

67.57

86.34

1996

35.43

73.83

88.82

1997

36.32

79.02

90.84

1998

41.27

89.38

92.05

1999

43.06

92.4

94.06

2000

44.94

95.85

97.35

2001

47.19

99.96

100

2002

48.6

104.06

101.38

2003

46.58

107.94

103.63

2004

45.32

112.26

106.34

2005

44.1

117.01

110.09

2006

45.33

125

113.6

2007

41.29

133

116.87

2008

43.42

145

121.64

2009

48.36

163

120.82

2010

45.74

180

123.32

2011

46.5

195

127.71

2012

47.92

215

130.39

2013

54.4

235

132.18

Source: 1. Database of Indian Economy-Reserve Bank of India,

http://dbie.rbi.org.in/ for Exchange rate and India CPI data.
2. For US CPI data (converted to 2001 base)
http://www.seattle.gov/financedepartment/cpi/historical.htm

11

Exhibit 7: Ten-year US and Indian Govt. Bond Yields

Average

USA

India

2006

4.78

7.66

2007

4.57

7.95

2008

3.59

7.86

2009

3.27

7.02

2010

3.13

7.83

2011

2.73

8.38

2012

1.74

8.31

2013

2.36

8.11

Note: Created by authors based on Thomson Reuters Eikon database

Exhibit 8: Trends in Exchange Rates of Currencies of Few Emerging Markets (2013)

120

115
Brazil
110

India
Russia
South Africa

105

Turkey
Indonesia

100

95
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Note: Graph based on exchange rates from Exhibit 9 with Jan. 2013 as base =100.

12

Exhibit 9: Exchange Trends (Local Currency per One USD)

Country

Brazil

India

Currency
Jan 2013

Real

Feb

2.032844
1.973499

Russia

South Africa

Turkey

Indonesia

Rupee

Ruble

Rand

Lira

Rupiah

54.24474

30.22728

8.792488

1.770204

9656.784

53.84735

30.19734

8.874704

1.775661

9682.544

Mar

1.98476

54.40531

30.82117

9.186378

1.807595

9706.435

Apr

1.998499

54.36633

31.3406

9.098645

1.795447

9722.832

May

2.035004

54.95519

31.32969

9.333389

1.825108

9752.297

Jun

2.17458

58.27126

32.33161

10.00473

1.897836

9875.253

Jul

2.253167

59.75162

32.77969

9.9321

1.934933

10087.48

Aug

2.338976

62.69576

32.99785

10.05959

1.959233

10601.13

Source: Web address - http://www.x-rates.com, accessed on Feb.20, 2014.

Exhibit 10: Net Capital Flows into India (USD million)
Month

Equity

Debt

Total

Jan-13

4,067

543

4,610

Feb-13

4,539

743

5,282

Mar-13

1,677

1,065

2,742

Apr-13

996

981

1,977

May-13

4,034

1,086

5,120

Jun-13

-1,892

-5,686

-7,579

Jul-13

-1,019

-2,015

-3,033

Aug-13

-945

-1,559

-2,503

Sep-13

2,047

-890

1,157

Oct-13

2,553

-2,207

346

Nov-13

1,297

-956

341

Dec-13

2,601

855

3,457

19,955

-8,039

11,916

Total - 2013

Note: Created by authors based on the data from Securities and Exchange Rate Board (SEBI) of India by using
average exchange rate (Exhibit 9) for respective months.
Source: Web address- http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii, accessed on Mar.16, 2014.

13

Exhibit 11: INR-USD Exchange Rate Predictions

Predicted by
Kanika Pasricha, ICICI Bank Ltd. 20
CRISIL21
Barclays22
A.V Rajwade23

Prediction for exchange

rate (INR/USD)
59-60
60
61
70

Remarks
In the near term
By end March 2014
By Feb-March 2014
Greater chances of the rupee
hitting 70 rather than 60
By Aug.2014

Jamal Mecklai, MD and CEO at Mecklai

57-67
Financial and Commercial Services Ltd.24
Harding, Independent expert
62-65
Deutsche Bank's analysts25
70
By October 2013
Note: Experts opinion collected from various sources (see respective footnotes)
Exhibit 12: FDI investment limits
FDI limit
100%

Sector/Activity
Agriculture & Animal Husbandry; Tea Plantation; Mining; Petroleum & Natural Gas; Civil
Aviation Airports; Courier services; Construction Development: Townships, Housing, Built-up
infrastructure; Industrial Parks new and existing; Trading- Cash & Carry Wholesale Trading/
Wholesale Trading (including sourcing from MSEs) and E-commerce activities; Single Brand
product retail trading; Non-Banking Finance Companies (NBFC); Pharmaceuticals
74%
Broadcasting Carriage Services; Other services under Civil Aviation sector; Satellites
Establishment and operation; Telecom services; Financial Services -Asset Reconstruction
Companies; Banking Private sector
51%
Multi Brand Retail Trading
49%
Air Transport Services; Private Security Agencies; Commodity Exchange; Credit Information
Companies (CIC); Stock exchanges, depositories and clearing corporations, in compliance
with SEBI Regulations; Power Exchanges
26%
Defence; Broadcasting Content Services; Print Media; Insurance
20%
Banking- Public Sector subject to Banking Companies (Acquisition & Transfer of
Undertakings) Acts 1970/80
0%
Lottery Business including Government /private lottery, online lotteries, etc.; Gambling and
(prohibited)
Betting including casinos etc.; Chit funds; Nidhi company; Trading in Transferable
Development Rights (TDRs); Real Estate Business or Construction of Farm Houses;
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes; Activities / sectors not open to private sector investment e.g. Atomic Energy and
Railway Transport (other than Mass Rapid Transport Systems)
Source- Department of Industrial Policy and Promotion26

20

WSJ, Aug.23, 2013.

http://blogs.wsj.com/indiarealtime/2013/08/23/analysts-rupee-heading-to-70/, accessed on Feb 25, 2014.
21
The Economic Times, Aug.23, 2013.
http://articles.economictimes.indiatimes.com/2013-08-23/news/41440695_1_current-account-deficit-foreign-capitalinflows-rupee, accessed on Feb 25, 2014.
22
Ibid.
23
The Economic times, Nov.4, 2013.
http://articles.economictimes.indiatimes.com/2013-11-04/news/43658895_1_treasury-risk-management-consultant-avrajwade-manoj-rane, accessed on Feb 25, 2014.
24
The Live Mint and Wall Street Journal, Nov.12, 2013.
http://www.livemint.com/Money/P4xmwBkcAv73fq2qcam0BJ/Rupee-opens-lower-against-dollar-ahead-of-IIP-inflationdat.html, accessed on Feb 25, 2014.
25
Financial Express, Sept.8, 2013.
http://www.thefinancialexpress-bd.com/old/index.php?ref=MjBfMDlfMDhfMTNfMV85Ml8xODI1OTc%3D, accessed on
Feb 25, 2014.
26
Department of Industrial Policy and Promotion, Consolidated FDI Policy, Apr 5, 2013.
http://www.dipp.gov.in/English/Policies/FDI_Circular_01_2013.pdf, accessed on Apr 23, 2014.

14

Exhibit 13: FII investment limits

Maximum allowed investment as
per cent of the paid up capital of
the Indian company
10%

Registered foreign investor entity

SEBI registered FIIs and its sub accounts
Foreign corporates or High Net-worth Individuals (HNIs)
5%
registered as sub accounts of an FII
24%
All FIIs and their sub-accounts taken together
5%
An Non-Resident Indian (NRI) or a Person of Indian Origin (PIO)
10%
All NRIs/PIOs taken together
Source- Reserve Bank of India- Foreign investments in India27

27

Reserve Bank of India.

http://www.rbi.org.in/scripts/FAQView.aspx?Id=26#3; accessed on April 11, 2014, accessed on Feb 25, 2014.

15