INDORE INSTITUTE OF LAW, INDORE

SUBJECT: ECONOMICS

TOPIC: RECORD DEPRICIATION OF RUPEE AGAINST DOLLAR.

SUBMITTED TO: SUBMITTED BY:

DR. CHITRA JOSHI PARYUSHI KOSHAL

[B.A. LL.B]

ROLL NO. - 12

SESSION: 2018-2023

SEMESTER – 3

1
 CERTIFICATE

This is to certify that Paryushi Koshal , B.A.LLB (HONS.) , 2 nd year – 3rd semester has
successfully completed the project assignment in partial fulfillment of requirements for the
knowledge of economics provided by Dr.Chitra Joshi prescribed by INDORE INSTITUTE
OF LAW .

This assignment is the record of authentic work carried out during the academic year 2019 - 20.

Signature of faculty ----------------------------

Date - ----------------------------

2
 DECLARATION

I hereby declare that the project assignment entitled ‘Record depreciation of rupee against
dollar’ submitted for fulfilling the essential criteria of INDORE INSTITUTE OF LAW, is a
record of an original work done by me under the guidance of Dr. Chita Joshi , B.A. LLB ,
Indore Institute of Law for the Academic session 2019 - 20.

Paryushi Koshal

BA.LL.B (Hons.)

2nd year – 3rd sem

3
 ACKNOWLEDGEMENT

Trust in the lord with all you heart and lean not on your own understandings; in all your ways
acknowledge him, and he will direct your paths.

It is not possible to prepare a project without the assistance and encouragement of other people.
This is certainly no exception. On the very outset of this project I would like to extend my
sincere and heartfelt obligation towards all the personages who helped me in this endeavour.
Without their guidance, help, cooperation and support I would not have made headway in this
project.

I am ineffably thankful to Dr. Chitra Joshi for conscientious guidance and encouragement to
accomplish this assignment.

I extend my sincere gratitude to INDORE INSTITUTE OF LAW for giving me this opportunity.

I also acknowledge a deep sense of reverence, my gratitude towards my friends and family
members who have always supported me morally as well as economically.

Last but not the least I want to thank THE ALMIGHTY who made everything possible.

4
 TABLE OF CONTENTS

1. Abstract

2. Introduction

3. What is currency depreciation?

3.1. Currency Depreciation Explained

3.2. Recent Example of Currency Depreciation

4. 5 Factors that affected Indian currency in 2018

4.1. What experts say
4.2. Factors contributing to rupee fall against dollar

5. Rupee depreciation and its consequences

5.1. Will a Weaker Rupee Boost Exports?

6. Steps taken by the government

7. Conclusion

8. References

5
 1. ABSTRACT

The Indian currency has depreciated by more than 20 per cent since April 2008 and breached its
crucial 50-level against the greenback on sustained dollar purchases by foreign banks and
stronger dollar overseas. The fall in the value of Indian rupee has several consequences which
could have mixed effects on Indian economy. But, mainly, there are four expected implications
of falling rupee. First, it should boost exports; second, it will lead to higher cost of imported
goods and make some of the capital intensive projects more expensive to execute; third, it will
increase the cost of dollar loans taken by companies and increase the foreign debt and fourth, it
will slow-down the overall economic growth by increasing the interest rate and dissuade flow of
FIIs. This paper studies the real implications of the depreciation of the rupee on the Indian
economy and shows that in the long run, the Indian economy has more to lose and less to gain
with weaker rupee.

Keywords: Depreciation, Rupee, Dollar, RBI, Economy.

6
 2. INTRODUCTION

Since Independence in 1947, India has faced two major financial crises and two consequent
devaluations of the rupee .Foreign exchange reserves are an extremely critical aspect of any
Country’s ability to engage in commerce with other countries. If a nation depletes its
foreign currency reserves and finds that its own currency is not accepted abroad, the only option
left to the country is to borrow from abroad. However, borrowing in foreign currency is built
upon the obligation of the borrowing nation to pay back the loan in the lender’s own currency or
in some other hard currency.

Despite government attempts to obtain a positive trade balance, India has had consistent balance
Of payments deficits since the 1950s. The 1966 devaluation was the result of the first major
financial crisis the government faced. There is a general agreement among economists that by
1966, inflation had caused Indian prices to become much higher than world prices at the pre-
devaluation exchange rate. Two additional factors played a role in the 1966 devaluation. The first
was India’s war with Pakistan in late 1965. The United States of America and other
countries friendly towards Pakistan, withdrew foreign aid to India, which further necessitated
devaluation. In addition, the large amount of deficit spending required by any war effort also
accelerated inflation and led to a further disparity between Indian and international prices. As
in 1991, there was significant downward pressure on the value of the rupee from the
international market and India was faced with depleting foreign reserves that necessitated
devaluation. It was during the year 1991 India faced a financial crisis and was following a
pegged exchange rate during that time.

In March 1993 the government then unified the exchange rate and allowed, for the first time, the
rupee to float. From 1993 onward, India has followed a managed floating exchange rate system.
Under the current managed floating system, the exchange rate is determined ostensibly by
market forces, but the Reserve Bank of India plays a significant role in determining the
exchange rate by selecting a target rate and buying and selling foreign currency in order to meet
the target. Initially, the rupee was valued at 31.37 to one US dollar but the RBI has since allowed
the rupee to depreciate against the dollar (RBI Bulletin, November 1994, pp 1485).
The wild fluctuations in the rupee exchange rate are unsettling and leaving its imprint on the rest
of the economy. The depreciating rupee will add further pressure on the overall domestic
inflation and since India is structurally an import intensive country, as reflected in the high and
persistent current account deficits month after month, the domestic costs will rise on account of
rupee depreciation. The rupee depreciation will particularly hit the industrial sector and put
higher pressure on their costs as items like oil, imported coal, metals and minerals, imported
industrial intermediate products all are getting affected.
Thus this paper is an attempt to study the factors behind depreciation of Indian money and its
impact.

7
 3.WHAT IS CURRENCY DEPRECIATION?

Currency depreciation is a fall in the value of a currency in a floating exchange rate system.

Currency depreciation can occur due to factors such as economic fundamentals, interest rate
differentials, political instability or risk aversion among investors.

Countries with weak economic fundamentals such as chronic current account deficits and high
rates of inflation generally have depreciating currencies. Currency depreciation, if orderly and
gradual, improves a nation’s export competitiveness and may improve its trade deficit over time.
But abrupt and sizeable currency depreciation may scare foreign investors who fear the currency
may fall further, and lead to them pulling portfolio investments out of the country, putting further
downward pressure on the currency.

3.1. Currency Depreciation Explained

Easy monetary policy and high inflation are two of the leading causes of currency depreciation.
In a low interest-rate environment, hundreds of billions of dollars chase the highest yield.
Expected interest rate differentials can trigger a bout of currency depreciation. While central
banks increase interest rates to combat inflation, too much inflation can threaten stability and
cause currency depreciation. 

Additionally, inflation can lead to higher input costs for export which makes a
nation's exports less competitive in global markets, which widens the trade deficit and causes the
currency to depreciate.

Quantitative Easing and The Falling USD 

In response to the financial crisis, the Federal Reserve embarked on three rounds of Quantitative
Easing , which sent bond yields to record lows. Following the first round of QE in 2008, the U.S.
dollar depreciated sharply. The U.S. dollar index fell by more than 10% in the six weeks
proceeding the commencement of QE1.

In 2010, when the Fed embarked on QE2 the result was the same. During the 2010 to 2011 USD
depreciation, the greenback hit all-time lows against the Japanese yen, the Canadian dollar and
the Australian dollar.

Political Rhetoric and Currency Depreciation

While economic fundamentals in most part determine the value of a currency, political speak can
cause a currency to fall.

8
Between 2015 and 2016, the U.S. and China were repeatedly in a battle of words with regards to
each other’s currency value. In August 2015, the People’s Bank of China (PBOC) devalued the
country’s currency, the yuan, by roughly 2% against the USD, with Chinese officials saying that
the move was required to prevent a further slide in exports. During the 2016 election campaign,
Republican nominee, Donald Trump vowed to label China a currency manipulator, saying
Chinese officials were purposely devaluing its currency, leading to unfair advantages on trade. In
2018, U.S.—China political rhetoric turned toward protectionism that has resulted in an ongoing
trade dispute between the world’s two largest economies.

Volatility and Currency Depreciation

Sudden bouts of currency depreciation, especially in emerging markets, inevitably raise the fear
of "contagion," whereby many of these currencies get afflicted by similar investor concerns.
Among the most notable was the Asian crisis of 1997 that was triggered by the collapse of the
Thai baht which caused a sharp devaluation in most Southeast Asian currencies. 

In another example, the currencies of nations such as India and Indonesia traded sharply lower in
the summer of 2013 as concern grew that the Federal Reserve was poised to wind down its
massive bond purchases. Developed market currencies can also experience periods of extreme
volatility On June 23, 2016, the British pound (GBP) depreciated over 8% against the U.S. dollar
after the U.K. voted to leave the European Union, referred to as Brexit.

3.2.Recent Example of Currency Depreciation—

Turkish Lira
Turkey’s currency, the lira, lost more than 40% of its value against the USD between January
and August 2018. A combination of factors led to the depreciation. Firstly, investors grew fearful
that Turkish companies wouldn't be able to pay back loans denominated in dollars and euros as
the lira continued to fall in value. Secondly, President Trump approved the doubling of steel and
aluminum tariffs imposed on Turkey at a time when there were already fears about the country’s
struggling economy. The lira plunged by as much as 20% after Trump released the news via a
tweet.

Finally, Turkey’s president, Recep Tayyip Erdogan did not allow Turkey's central bank to raise
interest rates, while at the same time, the country didn't have a sufficient amount of U.S. dollars
to defend its currency on foreign exchange markets. Turkey's central bank finally lifted interest
rates in September 2018 from 17.75% to 24% to stabilize its currency and curb inflation.

9
Brexit

Brexit is the most recent scenario which has impacted currency depreciation of GBP (Great
Britain Pound or Sterling) with USD. With Britain’s decision to exit itself from European Union
(EU), there was a huge impact on GBP. Till recently, Britain has been a part of the European
Union, and hence EUR is prevalent in the UK. However, with Brexit, UK will have its official
currency as GBP (and not EUR).

10
 4. 5 FACTORS THAT AFFECTED INDIAN CURRENCY IN 2018

The Indian rupee has witnessed high volatility this year, falling nearly 14 per cent between April
to October, as investors dumped the local currency in wake of global headwinds coupled with
widening current account deficit led by higher crude oil prices. Adding to it, strong demand for
the US currency from importers and foreign fund outflows also weighed on rupee movement.
The Indian currency had hit its all-time intra-day low of 74.45 against the US dollar on 11
October, 2018, making it one of the Asia's worst performers.

4.1.What experts say

India Ratings, in a publication, said that the global developments such as strengthening of the US
dollar, high commodity prices especially of crude oil, tighter monetary conditions in the US,
coupled with domestic factors such as expanding current account deficit, inflationary pressures
and likely fiscal slippage are together impacting the rupee. The agency expects rupee to average
Rs 69.79/$ in FY19 (1HFY19 average: Rs 68.57/$), a depreciation of 8.3 per cent. This is,
however, contingent upon mobilization of $30 billion from non-resident Indian similar to 2013.
Depreciation in rupee against the US dollar so far is at a five-year high. However, a longer term
view suggests that average depreciation in rupee versus the dollar during FY15-FY19 will be
only 3 per cent, which is at par with 20 years average depreciation 
According to a CRISIL report, on average basis, the decline in rupee is less steep at 7.4 per cent
on-year, but still much higher than the trend rate of depreciation, of approximately 2.5 per cent
average per year, in the last fifteen years.

4.2.Factors contributing to rupee fall against dollar

Strong demand of US dollar: 

One of the important factors driving down the domestic currency has been strong demand of the
US currency from importers and banks and weak condition of regional Asian currencies against
greenback.

Rising crude oil import bill: 

Weakening rupee makes our import costlier. Since India depends on imports for large part of
crude oil, a weak rupee shoots up the fuel prices.

11
Fed rate hike: 
The rupee came under pressure after the US Federal Reserve hiked interest rate as it made US
treasuries more attractive and also boosted the dollar. The US Federal Reserve has raised its key
interest rate four times this year, a move that made the greenback a more attractive bet than other
currencies. Fed rate hike impacts India and other emerging economies, because the US is the
world's biggest economy and the world's primary reserve currency is still the dollar.

Turkey currency crisis: 

Turmoil in Turkish currency affected Indian currency during the first half of the year after
Turkey's central bank struggled to contain its local currency 'Turkish Lira'. Rupee fell to record
low levels after Turkey's widening diplomatic spat with the US spooked investors sentiment.

Stock market movement: 

The rupee has been well supported by Indian equity market this year. The Sensex and Nifty look
set to close on a positive note despite witnessing volatile phases of trade during the period. The
BSE Sensex has logged over 5 per cent gains this year and the Nifty has gained nearly 3 per cent
during the same period on the back of strong economic fundamentals and falling crude prices.

Crude oil boiling again

A steep rise has been observed in the crude oil prices from late-June 2017 till late-January 2018.
Crude oil prices also saw a  sharp dent when Brent crude oil plunged to $63 per barrel from a
level of $70 per barrel within two weeks from 26 January to 9 February 2018. But since mid-
February 2018, crude oil prices have mostly risen with Brent crude oil topping a level of $80 per
barrel in May. Recently last week, Brent crude oil prices eased to $73/bbl but resurged to a level
nearer to $78/bbl within six days.

Trade war between US and China

For more than three months now, US and China have been involved in heated up trade war as
these countries are imposing import tariffs on goods from either of these countries. Both the
nations have triggered a trade war situation which is not adaptable for countries like India.
Initially, US President Donald Trump imposed tariffs on a number of Chinese goods worth
billions following which, in a retaliatory manner, China too imposed tariffs on American
products and raised duties on several goods.
“Trade war is leading the markets into period of risk off where prices of all assets are moving
lower. US Dollar and Japanese Yen are emerging as beneficiary from trade war. Indian Rupee is
already under pressure from high crude oil prices and ongoing trade war could spark another
bout of capital outflows,” Bhavik Patel, Senior Technical Analyst, Tradebulls Securities told FE
Online.

12
 5. RUPEE DEPRECIATION AND ITS CONSEQUENCES

A weak rupee would make imports of goods and services costlier. The firms will pass on
increased import costs to the end-consumers.

A depreciating rupee along with higher oil prices would prove to be a double whammy for the
Indian economy. India is the world’s third-biggest oil consuming nation after the US and China.
At present, India imports about 82 percent of its crude oil consumption. Notwithstanding official
pronouncements, little efforts have been made in the past two decades to reduce dependence on
oil imports by boosting domestic oil exploration and production. As a result, the country’s
dependence on oil imports is increasing day by day. Crude oil is the largest import bill for India.

Since April 2018, international crude oil prices have surged in response to production cuts
undertaken by OPEC, the rise in geopolitical tensions in Asia, and economic sanctions imposed
on Iran by the US. With Brent crude oil prices currently hovering around $74 a barrel, it will
worsen India’s current account deficit besides stoking high inflation. In addition, the country’s
fuel subsidy bill will increase, thereby adding to fiscal pressures and forcing the government to
curtail social sector spending. If the government asks state-owned oil firms to share the fuel
subsidy burden, it will directly affect the profitability of these firms.

The rupee depreciation should also cause worry to India Inc. due to their unhedged currency
exposure. Although the exact data on the use of hedging against currency risks by Indian
corporates is not available, a study by India Ratings found that only 36 percent of the top 100
corporations with overseas borrowings are hedged for currency risks.

Taking advantage of ultra-low interest rates prevailing in the advanced economies in the post-
crisis period, non-financial corporations from India (and other EMEs) issued foreign-currency
debt (mostly in the US dollar) in international markets. The external commercial borrowings
(ECBs) of Indian corporates have significantly increased during the post-crisis period. The rupee
depreciation will directly affect the balance-sheets and credit profiles of such corporates that
have issued securities without proper hedging currency risks. These corporations may find it
difficult to service their foreign-currency debt and may suffer huge losses due to increase in
repayment burden.

13
5.1.Will a Weaker Rupee Boost Exports?

There are some who argue that a weak rupee will make exports more competitive and thereby
spur exports of goods and services. A weaker currency alone cannot boost a country’s export
while a gradual, non-disruptive depreciation as part of a wider trade strategy can be beneficial in
the long run.

In the current context, a depreciated rupee may not help much in boosting exports due to four
key reasons.

First, the ongoing currency depreciation is not unique to India. The currencies of many other
EMEs are also depreciating concurrently. Some competing EMEs have witnessed even greater
depreciation in their currencies. Besides, their exports basket is not vastly different from India’s.
In such a scenario, the ongoing rupee depreciation is unlikely to boost India’s exports.

Second, the recent episodes of rupee depreciation had no significant positive impact on Indian
exports. During the ‘taper tantrum’ episode of 2013, Indian rupee lost 20 percent of its value, but
that did not result in significantly higher exports.

Third, a large segment of India’s merchandise exports (such as gems and jewelry, chemicals, and
textiles) has a very high import intensity due to their dependence on imported inputs. For such
export items, any gains from a depreciated rupee will be automatically neutralized by higher
costs of imported inputs.

Fourth and more importantly, it is not easy to stimulate exports through currency depreciation
when the global demand is sluggish. As global demand is expected to remain subdued in the next
few years, India’s export prospects are limited. Besides, protectionist tendencies are on the rise
around the world. Despite having a competitive advantage in IT services, India’s IT services
exports are facing headwinds due to the rising tide of protectionism in key markets. At a time
when the world’s two biggest economies are headed for a trade war, the outlook of India’s
exports remains gloomy.

14
 6. STEPS TAKEN BY THE GOVERNMENT TO CURB THE RECORD
DEPRECIATION OF RUPEE

The government announced an array of steps, including removal of withholding tax on Masala
bonds, relaxation for FPIs, and curbs on non-essential imports, to contain the widening CAD and
check the rupee fall.

The decisions were taken at a meeting chaired by Prime Minister Narendra Modi to review the
prevailing economic issues.

Modi was briefed the then RBI Governor Urjit Patel, and then top officials of the finance
ministry on the health of the economy.

These measures are likely to have a positive impact to the tune of $8-10 billion, a top finance
ministry official said.

Briefing media after the meeting, the then Finance Minister late shri Arun Jaitley said the
government has decided on "five steps" to contain CAD, which widened to 2.4 percent of the
GDP in the first quarter of 2018-19.

He said several issues were discussed during the meeting and decision on those are likely in the
next few days.

The minister said that external factors like policies adopted by the US, trade war and crude oil
prices are impacting economies like India, despite "strong fundamentals".

However, "there are some issues on which immediate action is needed," the minister said while
announcing steps to increase inflow of foreign funds and check CAD.

One of the important decisions is that mandatory hedging condition for infrastructure loans will
be reviewed. This relates to external commercial borrowing (ECB).

Jaitley said the government gives importance to fiscal deficit and expressed hope it would be
contained.
Economic Affairs Secretary S C Garg said the five measures would definitely have a meaningful
impact. "It is difficult to give a specific number. I think it should have an impact of USD 8-10
billion," he said.
The rupee touched an all-time low of 72.91 against the US dollar on September 12 and it closed
at 71.84.

The domestic currency has declined around 6 percent since August and touched an all-time low
of 72 level this week. Petrol and diesel prices have also touched record highs.

15
6.1. Economists’ view on the steps taken by the government.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, was not sure how much capital
flow will come from these measures but agreed that no panic reaction was needed.
“Though we need to be vigilant of rupee depreciation, there is no need to press the panic button
and announce any Big Bang measures because our fundamentals are stronger compared with
others,” Bhardwaj added.

India’s former chief statistician Pronab Sen had a different view. “I am puzzled by these
measures since they seem to be sending out wrong signals,” Sen said. “First, they give the
impression that the government is panicking, which will worry investors and encourage
speculators because it is rightly assumed that the government knows much more than the average
investor/speculator.” “They will assume that government is worried about something if they
want to raise $8-10 billion despite RBI holding $400 billion of forex reserves,” he added.

India’s former chief statistician Pronab Sen had a different view. “I am puzzled by these
measures since they seem to be sending out wrong signals,” Sen said. “First, they give the
impression that the government is panicking, which will worry investors and encourage
speculators because it is rightly assumed that the government knows much more than the average
investor/speculator.” “They will assume that government is worried about something if they
want to raise $8-10 billion despite RBI holding $400 billion of forex reserves,” he added.

16
 7.CONCLUSIONS

Thus we can see that since 1950 besides few appreciation rupee is depreciating against US dollar
and the causes of depreciation are invariable different. Even after taking few measures
by government if we see the recent depreciation, Rupee depreciation has abated but it still
remains under pressure. Both domestic and global conditions are indicating that the downward
pressure on Rupee to remain in future. Thus, RBI should likely to continue its policy mix of
controlled intervention in forex markets and administrative measures to curb volatility in Rupee.
Apart from RBI, government should take some measures to bring FDI and create a healthy
environment for economic growth. Some analysts have even suggested that Government should
float overseas bonds to raise capital inflows.

17
 8. References

• Iyer, Shriram (2008), The Rupee is Likely to Strengthen, The Economic Times, September 19.
• Jaleel, K. Tania (2008), Emerging Markets Most Hurt in Bear Run, The Business line
October 31.
• Joshi, Rishsi (2008), ―The Rupee Conundrum: Is India Inc. Prepared to Deal with the
Volatility
in the Indian Currency?‖, Business Today, Vol. 17, No. 21, October 19, pp 23-24.
• Lavanya, C.N.M. (2008), The Impact of Rupee Depreciation, The Hindu, November 2.
• Mark, Taylor (1996), ―The Hyper Inflation Model of Money Demand Revisited‖, Journal of
Money, Credit and Banking, Vol. 23, No. 3, pp 327-61.
• Srinivas, Srikanth (2008), ―Will Loose Mean Tight?‖, Businessworld, Vol. 28, No. 24,
October
27, p 22.
• Stockman, C. Alan (2004), ―Dollar Depreciation Will Not Contribute to US Inflation‖,
Prepared for Meeting of the Shadow Open Market Committee, University of Rockester,UK.
• Sumanjeet (2007), ―Appreciation of the Indian Currency: Implications for the Indian
Economy‖, World Affairs: The Journal of International Issues, Vol 11, No. 4, Winter, pp 52-69.
ASSOCHAM (2012), ―Exchange Rate Slide – What Impact Is It Having‖

18