USD-INR Predictions

Ashwini Dhavale
Nimmikrishna Nair
Deepa Rao
Sejal Tom
Rajat Baid
Vishal Ramrakhyani


Synopsis
The USD-INR exchange rate is an important indicator of investor sentiment and
can significantly impact not only the fortunes of individual firms and sectors but
also the government
USD-INR moved from 40 to 51.50 from March 2008 to March 2009.
The US Dollar (USD) against the Indian Rupee (INR) is emerging as a popular
currency pair out of the exotic pairs group.
Indian Rupee (including the Euro) have a market-determined or floating
exchange rate. As India's economy and business climate continue to develop and
grow, trading the USD/INR pair has become an attractive investment opportunity
for forex traders.
Participants in Forex Market
Individuals: tourists, migrants
Firms: importers and exporters
Banks: short position, long position, square position
Governments/ monetary authorities: market intervention
International agencies: lending
Two tier market:
First tier: ultimate customer and banker
Second tier: between banks

Reasons For Depreciation
Widening current account deficit
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.
Low forex reserves: India's foreign exchange reserves are enough to cover imports of
only seven months. The forex reserves have declined in the recent months. Due to low
reserves, the RBI can't intervene aggressively in the currency markets.
Growth slowdown: India's gross domestic product (GDP) growth fell to a decade low of 5
per cent in 2012-13. The situation is unlikely to improve much this year. Foreign investors
are pulling money out of the Indian markets due to slow growth.

Reasons For Depreciation
Dependence on foreign money: India's current account deficit was financed by
foreign money for the last many years. Withdrawal of money by overseas
investors is leading to the weakness in the rupee.
Recovery in the US: The slow but steady recovery in the US is making the
greenback stronger against other currencies.
Trends in other markets: The rupee is also following the trend seen in the
currencies of other emerging economies such as Brazil, Indonesia, Russia and
South Africa.
Speculative trading: Speculative trading in the currency markets is putting
further pressure on the Indian rupee.

Effects of Depreciation on Indian Economy
Countrys fiscal health: Frail rupee added 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.
Importers/Exporters: Importers strongly felt the pinch of falling rupee as they
were forced to pay more rupees on importing products. Conversely, a feeble
rupee brought delight to the exporters as goods exported abroad fetched dollars
which in return translated into more rupees.
Imported goods: Buying imported stuff became a very costly affair. One had to
shell out extra on imported goods. For instance if you bought a product valued
USD 1, you paid around Rs 54 (weeks ago) but you will now have to shell out
close to Rs 61 for the same product.
Effects of Depreciation on Indian Economy
Fuel price: A weak rupee increased the burden of Oil Marketing Companies (OMCs) and this
was passed on to the consumers as the companies are allowed to do so following
deregulation of petrol and partial deregulation of diesel. When the OMCs increased fuel
prices, there was a substantial increase in overall cost of transportation which stoked up
inflation.
RBIs monetary policy: Depreciation led further increase inflation. In such a situation RBI had
have very less room to cut policy rates. No cut in policy rate added to the borrowers woes
who were eagerly waiting to get rid of the high loan regime.
Students studying abroad: Students who are studying abroad had to bear the brunt most
owing to depreciating rupee. Expenses incurred towards the university/college fee as well as
that of living shot up, thereby spelling a huge burden on the students.
Tourism: The depreciating rupee was a dampener for people who were planning holiday
abroad. Travel charges as well as hotel charges was escalate drastically, let alone shopping and
other miscellaneous spending activity
RBI Intervention in last 6 Months
Forex reserves came to 3 year low at approx. $275 Billion in August 2013
compelling RBI to intervene in the market.
RBI came out with bonds which helped them to bring in close to $10 billion,
helping them shore up some of the foreign exchange reserves.
Government in consultation with RBI came up with reforms including raising FDI
Caps in various sectors like Aviation, Pension funds, etc.
Ban on Imports of Gold
Keeping check on speculations in the market
RBI Intervention in last 6 Months
RBI allowed the three state-owned oil companies to buy dollars directly, the
latest in a series of moves to arrest volatility in the domestic currency.
Doing Spot and Forward FX swaps.
the Reserve Bank of India intervened by forcing exporters to bring in their dollars
when the rupee fell to its previous low.
Future Predictions- Primary Factors
Better Growth: Indias economy is expected to grow at 5.5% in 2014-15 due to high
exports and increase in investment demand
Lower inflation: The consumer inflation represented by CPI index is forecast at 8.3% and
wholesale prices are expected to rise at 6.3% in 2014-15 due to rising administered
prices and an elevated inflation expectation.
High interest rates: Keeping the Interest rates the same and not pumping in more
liquidity in the market will help the economy to remain stable
Lower current account deficit: The CAD is expected to remain under 3% of GDP in FY14-
FY16, close to sustainable levels, driven by better exports alongside weaker oil and gold
imports.
These factors will help the Rupee to appreciate to levels between 58 and 60 in the coming
months
Future Predictions- Other Factors
Stable government will help the Rupee to appreciate in the current fiscal along
with proper reforms which will attract foreign investors in the long run which will
help rupee to appreciate further at Rs. 57-58
There will be some pressure in the initial months after new Govt. is formed and
may see Rupee falling to Rs. 61-62 per Dollar. But this will be for a very short
period of time.
Also the current steps taken by the Government and RBI to reduce the volatility
of USD-INR will help the value of Rupee being at the current levels i.e. between
Rs. 60 -61
Future Predictions- Other Factors
If an Unstable Govt. or a Coalition Govt is formed at the centre then there is a
high risk of Rupee depreciating in the coming months and going to level of Rs.
62-64.
This will be because of the political uncertainty, reforms will not take place at the
pace it would like to, and the government might not be investor friendly.
Bibliography
Moneycontrol.com
Economictimes.com
Livemint.com
Reuters.com
Google.co.in