Decreasing value of rupeecauses , impacts and remedies

Presented by 1. 2. 3. 4. Swati mahajan Nidhika sharma Shweta parashar Priyanka mahajan

ROAD MAP
1. INTRODUCTION 2.CURRENT SCENARIO 3. CAUSES 4. IMPACT 5. REMEDIES 6. CONCLUSION

INTRODUCTION

Every country exports and imports for its survival. As long as

this equation of imports vs. exports is balanced, it is good for the nation but when imports becomes more than exports, the value of the currency starts declining. It means that the country needs more from other countries while it has little to offer to them. Indian goods are bought with Indian rupees. Hence if the demand for Indian goods fall, consequently the demand for Indian Rs. also falls. India has dual challenges. While the demand for Indian goods seems to be waning, due to exports slippage, Indian continues to import crude(petrol, diesel)/ and other imports vital for the economy at high international commodity prices and inelastic demand for gold and silver. Therefore the demand for the dollars continues to be high. This situation puts further pressure on the Indian rupee widening the current account deficit.

 Each country has its own currency except in Europe where a

group of countries has a common currency. The rate at which one currency can be exchanged for other is called exchange rate. This rate changes on daily basis depending upon the demand and supply of currency. A country has to pay more rupees against the dollar in the case of depreciation
India has pursued poor economic policies and the politicians have mismanaged economy for the last 50 years, said Swiss investor and editor of the 'Gloom Boom & Doom' report Marc Faber to ET Now. "You cannot blame the Reserve Bank of India entirely for the current situation," he said. "I doubt if India has the political will to face the music," he added. '

According to Faber, India needs to take some tough decisions to pull itself out of the slowdown. "India is underperforming significantly in dollar terms," he said. While attacks on Syria could lead to higher crude oil prices, Faber said that the pain of higher oil prices is magnified by rupee weakness in India. Asked about the Indian stock markets, Faber said, "The bearish trend in Indian equities may last longer." Indian stocks have fallen because of rupee weakness, he added. Faber is of the opinion that one is 'approaching a buying range for Indian equities

CURRENT SCENARIO

Depreciation in rupee has become a big tension for the Indian

Government and breaking news for the news channels these days. Rupee has declined to its peak level in the month of July, 2013 and is expected to continue in coming days. The current exchange rate as on 5\9\13 is 68.600 with a current GDP of approx 5% India 's economic confidence collapsed sharply due to continuous depreciation of rupee, hitting an all-time low and high current account deficit, according to a report by global research firm Ipsos. According to the Ipsos survey, India's economic confidence dropped by massive 7 points to 53% in the month of August compared to the month of July 2013, dragging its rating down to seventh most economically confident country in the world.

"Indian economy is in distress with rupee depreciating sharply against dollar. Strong demand of US currency from importers and banks, continuous capital outflows, widening current account deficit and dollar's strength against other currencies overseas amid expectation that the Federal Reserve will soon taper its bondbuying programme has put enormous pressure on the rupee," said Mick Gordon, CEO of Ipsos in India.

CAUSES FOR THE DEPRECIATION OF RUPEE

1) Demand Supply Rule:
Why does rupee fluctuate?
The value of a currency, like any traded goods or services, depends on demand and supply

[ WHEN DEMAND > SUPPLY THEN RUPEE DEPRECIATE ]

What affects demand and supply?

The supply of dollars depends on two factorsexports and investments. When goods or services are exported, the exporter gets the payment in dollars which is converted into rupees in India, boosting the supply of dollars. On the other hand, if individuals or companies buy goods and services from abroad, they need dollars to settle the bills, leading to an increased demand of dollars

 Now, every country has an external account to keep a track of

the cross-border transactions being carried out. This external account has two components: Current Account: Cross-border transactions in the goods and services market is recorded in the current account . Capital Account: This records cross-border flow of investment and debt.

Why is rupee depreciating?

India runs a current account deficit, which gets compensated by the inflow on the capital account (foreigners investing in India, including direct and portfolio investments). In recent times, our current account deficit has widened and capital flows are not being able to bridge the gap. In the quarter ending June, the deficit expanded to 6.7% of the gross domestic product compared with 4.3% in the same quarter last year. As a result, the demand for dollars is high, while the supply remains low. Hence, the rupee is falling.

A graphical representation of the causes and repercussions of the Rupee downfall

 3) Oil prices:
It is another factor that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-onyear. The domestic demand for oil increases which causes the price of oil to increase in the international market. The demand for dollar also increases to pay our suppliers from whom we import oil.. This increase in demand for dollar weakens the rupee further.
As suggested by TUSHAR A KATIRA main reason why government is directly responsible on this front is because of it's policy paralysis. The Indian government's present policies on Oil & Gas subsidy is why the prices are going high. Much remains to be done by the government on this aspect.

 55% of India's oil imports are used for transportation of goods

and people. And 50% of that or 27% of the total is used for transporting the 1.8% Indians who own cars from A to B in cars that weigh at least 15 times the weight of the owners (the Maruti Alto weighs 1156kg and an average Indian less than 70kg). This private transport is subsidized explicitly (if the car is diesel powered) while Indian Railways and rail travelers are forced to pay un subsidized market prices for diesel.
So 1.8% of the car owning public is majorly responsible for the oil demand and oil imports and the Rupee depreciation

 4) Volatile domestic equity market:

Our equity market has been volatile for some time now. Equity is nothing but the investments in Indian companies made by Foreign Institutional Investors(FIIs). Some examples of Private equities investing in India are Blackstone, IFC, Berkshire Hathaway etc. So, the FIIs are in a dilemma whether to invest in India or not(because of the lack of overall confidence in the Indian economy). Even though they have brought in record inflows of dollar to the country this year, chances are they may be thinking of taking their money out of the equity market, which might again results in less inflow of dollars in India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.

5. Repercussions of falling Rupee

Significant depreciation affects the overall confidence in the economy and policy making becomes difficult. Importers have to shell out more rupees for the same amount of goods in dollars leading to inflation. For example, suppose an Indian buyer pays Rs 50 for an article priced at $1. If the currency depreciates to Rs 60, the buyer will have to pay Rs 10 extra for the same article, still priced at $1. It hurts foreign investors as they get fewer dollars for the same amount of rupees realized. It also increases the liability of companies having dollar debt as they need to earn more rupees to repay the same debt. It, however, benefits exporters as goods become cheaper in dollar terms.

 6. IMPORT OF GOLD
Gold is the major commodity which has been imported in our country In spite of increasing the value of import duty from 6 to 8% the import of gold has not been stopped

 7. Recession in Euro Zone:

The effect of recession in Euro Zone has been seen in Indian market also. The investors are selling Euros and buying Dollars which resulted in high demand for dollars and thereby increase in value of dollar.

 Negative remarks of credit agencies:

The major credit rating agencies such as Finch, S&P etc.

have given negative remarks for India which made many foreign investors to stay away from investing in India for time being which resulted in reduction in inflow of foreign currency and thus depreciation in the value of rupee

Rupee decent can be understood in few steps:

1) When Sub-prime crisis hit the world, India and China were the leaders in terms of growth. When US and Euro zone started quantitative easing (QE), there was easy money available for investment funds and it flew to fast growing economies - India and China. (Remember, Rupee went as high as Rs. 39/ Dollar during this time) 2) When Supreme Court questioned 2G/3G scams and prevalent policies, officers following those policies were also brought under investigation and they were questioned as well as officers who broke those policies. Same happened in Coal scam as well. Now, this created confusion in the mind of bureaucracy. Officers stopped signing files. This led to environment of Policy Paralysis. Opposition also helped it by disrupting parliament. 3) Fast growth in economy led to increased income and explosion in demand, which in turn led to supply side led inflation. RBI hit hard to control Inflation, which led to increased interest rates. Investment became costlier for companies, which further increased demand-supply gap.

4) Prolonged recession caused decrease in exports, specially towards US and Euro zone. Higher imports of Oil and Gold led to increase in Current Account Deficit (CAD). 5) Almost a month back, US treasury head made a statement of stopping QE, money started flowing back to US. All currencies dropped compared to US Dollar. However, Rupee fall is drastic because of high CAD and higher flow of dollar from the country (remember India and China got major share of dollars during QE, and China currency is controlled. US funds needed Dollars which increased its demand).

6) When Rupee started going down, exporters held on to dollars they earned by selling products in hope of earning more if Rupee fell more. This increased demand - supply gap for dollar. This led to downfall of Rupee.

 What are the reasons that have impeded the efforts of the

government in tackling rupee fall? Why cant the government check the depreciation of rupee? Why have even RBI measures aimed at tightening liquidity failed to give a boost to the staggering rupee? These are a few questions that continue to crop up every time rupee crashes to newer lows.

 Worsening current account deficit

High Current Account Deficit (CAD) is the main reason that has continuously impeded all efforts of government in arrest the fall of rupee. India posted a record current account deficit of 4.8 percent of gross domestic product (GDP) in the year ending March. Governments failure to explore new destinations has led to poor growth of exports. In the absence of a single window clearance system and process delays, exports have failed to register good growth. Even traditional export areas have failed to show resilience making Indian produce globally less competitive.

Insufficient FDI inflows

Despite all the decisions to allow major reforms in India, the government has failed to tap major FDI inflow in the country. Instead, India has witnessed withdrawal of major projects by global giants like Arcel or Mittal and Posco. Posco pulled out of its Rs 30,000 crore steel plant project in Karnataka followed by Arcel or Mittal that scrapped its USD 12 billion (Rs 50,000 crore) steel plant project which it was planning to set up in Odisha. Inordinate delays, land acquisition problems, government clearance delays, lack of promptness have all contributed to the withdrawal of major companies. Last year Indian companies spent more overseas than Foreign Investors in India.

FII outflows Overseas investors have pulled out nearly Rs 18,500 crore (about USD 3 billion) from the Indian capital markets in July. In their highest monthly outflow, overseas investors pulled out a record Rs 44,162 crore (over USD 7.5 billion) in the month of June. Outflows of FIIs have put a continuous pressure on rupee not allowing it to come out of the slump. Meanwhile, leading global bank Goldman Sachs has downgraded Indian stocks to underweight and recommended investors to stay selective on concerns of economic growth recovery

Rising Import bill

Rising import bill (arising out of gold) is also a major factor that has curtailed governments effort to tackle the fall of rupee. Gold contributes to over 10 percent of the total import bill. Gold imports were 141 tonnes in April and rose to 162 tonnes in May. Due to certain government measures gold imports declined significantly to 31 tonnes in June but could not be held for the month of July. For the first 25 days of July, the imports stood at 45 tonnes.

 Overall economic contraction

Poor economic growth in the manufacturing, agricultural and mining sector has dented investor sentiment and they have become wary of investing in India. Reflecting a persistent slowdown, industrial production in June contracted by 2.2 percent. Last month RBI cut its growth forecast to 5.5 percent for the fiscal year, from 5.7 percent. Unless a better sentiment prevails, confidence in the rupee will stay shattered.

Strengthening of dollar overseas

In the year to date US dollar index strengthened by 1.86 percent. The strengthening of dollar is beyond governments control which is ultimately hammering the Indian currency. Gradual recovery in US economy coupled with rising expectations that Federal Reserve will withdraw its stimulus package soon is underpinning the US dollar index. However one must not be completely cynical about bouncing back of rupee. A medium to short-term approach towards growth has to be adopted by the government. Constant efforts of the government might bring a very marginal respite for the rupee, but to bring it back to 55-level will be an uphill struggle.

IMPACT OF THE RUPEE DEPRECIATION

THE PRICE OF petrol has gone up substantially. Also the price of diesel and LPG could spike. when the price of fuel goes up then the cost of transportation goes up and when the cost of transportation goes up the cost of goods goes up and thus inflation goes up. As we

have a current account deficit, rupee depreciation has an inflationary impact.

Companies which are dependent on raw material imp-ort or have imported components could d see profitability and market

capitalization take a beating this is because its profitability may get hit by higher import cost

Foreign travel is set to get costlier. One would have to keep more rupees on hand to purchase dollar to fund foreign travel.

Studying in foreign university may get costly. This is the same in case of foreign travel more rupees would be needed to fund foreign education Several electronic goods which depend on imports and royally payouts may get more expensive NRIS and exporters could be happy and can be expected to remit more dollars as they would get a higher price. Companies like IT software, pharma, BPO would gain from he dollars that they earn by providing goods and service abroad At the industry level the cost of borrowing has been increased to a great extent for the companies which has taken foreign loans

REMEDIES

SHORT TERM REMEDIES

LONG TERM REMEDIES

SHORT TERM REMEDIES

RBI last week had announced measures such as restriction on

Indian firms investing abroad and on outward remittances by resident Indians, triggering talks of return of capital control regime. 1. Allowing sovereign wealth funds, endowment funds and foreign central banks to invest in government bonds.

2. Raising the foreign investment cap. 3. Boost the slowing industrial growth. 4. More exports incentives and reduce imports. 5. Limit the foreign currency expenditure.

 6. The RBI could persuade banks and financial institutions to raise funds

in dollars abroad and lend them locally.

7. The government could review sectors such as defense, or revive pension and insurance reforms. on entertainment and travel, and it may help cushion the hike in prices of essential items.

8. Rationalize your spending by slashing discretionary spends like those

9. Stay with defensive sectors like IT, pharma and FMCG for now.

- Since the RBI is not expected to cut rates soon, avoid high-beta, rate-sensitive sectors like real estate and infrastructure for now. - Since the rupee depreciation will compound asset quality issues, it is better to concentrate on private-sector banks

10.Since the interest rates are expected to come down in the medium to long term, continue to hold on to long-term debt papers and debt/gilt funds.

LONG TERM REMEDIES

1. According to oil minister M Veerappa Moily India can save

nearly $8.5 billion, i.e. around Rs 57,000 crore, by importing cheaper crude from Iran. With such an import, not only can India get cheaper oil it so badly needs, but it can also pay for this in Indian currency, saving the badly needed foreign exchange reserves that are also falling so fast that India might have to go with a bowl (made in China) to the World Bank/IMF.

2. India currently has no option but to go with Moilys

suggestion. This is because Americans are in no position to help Indias falling rupee or impending economic crises, since they are unable to lift themselves out of their own recession

3. The United States also wants India to open up its economy more for US imports as part of their strategic partnership deals. Both these US demands are bad for the Indian economy because nuclear power is highly expensive, dangerous and Indian people have opposed it wherever there has been an attempt to open a plant 4. The other way to save on precious foreign exchange reserves and protect the falling rupee is to cut down on our huge military imports. Of course, the Indian military needs some amount of modernization. But the billions of dollars envisaged, that are making India amongst the biggest arms importer in the world, speak poorly of a country that is struggling to pay its food bill. 5. Issue dollar bond India has a huge base of non-resident Indians whose remittances contribute to narrowing the current account gap, which is roughly the difference between imports and exports. In the 1990s, when India was facing pressure on its balance of payments, the government sold dollar bonds to non-residents and used the money to fund its current account gap.

 6. Raise interest rates: Some analysts are

calling for the central bank to raise Indias interest rates to make Indian debt more attractive to foreign investors. Now India needs to have a strong monetary policy if it wants to stem the fall of the rupee 7. attracting the foreign investors by bringing changes in the policy reforms 8. Import of gold up to a certain extent should be provided and the import duty should be raised

CONCLUSION

Depreciation in rupee is not a permanent phenomenon but it is due to various reasons, some of which are stated above. Since there are various internal as well as external reasons behind this situation, it is not always easy to make situation better in a blink of eye. It takes time to bring back the situation to the normal state. The RBI and other Government agencies are doing their best to tackle this situation.

SOURCES
http://www.business-standard.com/article/finance/rbi-steps-in-to-arrest-rupeedepreciation-111121600115_1.html

http://newindianexpress.com/opinion/Foreign-policy-amidinflation/2013/09/05/article1768116.ece
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