Project Report

On


RUPEE DEPRECIATION IMPACT ON
INFLATION
MASTER OF COMMERCE
(2012-2013)


Submitted by
KHOT ZARA ARSHAD



K.M.E.Societys
G.M.MOMIN WOMENS COLLEGE
THANA ROAD, BHIWANDI-421302


k.m.e.s Societys G.M Momin College Thana Road
Bhiwandi
CERTIFICATE
(2012-2013)


This is to certify that Miss Zara Arshad Khot of M.Com
(2012-2013) has successfully completed the project on
Rupee Depreciation Impact on Inflation under the
guidance of Prof.Pawar

Date:
Place:

-------------------- ----------------------
Prof.Naznin Momin Mrs.Kamala
HOD balasubramainum

--------------------- ------------------------------
Prof.Pawar External Examiner
Project Guide


Declaration by student


I ,Khot Zara Arshad the student of M.Com(2012-2013) hereby declare
that I have completed the project on Rupee Depreciation Impact on
Inflation successfully.

The information submitted is true and original to the best of my
knowledge.

Thank you,


Yours faithfully
----------------------











Declaration by guide

Date:-


I,the undersigned Prof .Pawar have guided MISS.KHOT ZARA
ARSHAD, ROLL NO-6,for her project on Rupee Depreciation
Impact on Inflation successfully.

I hereby ,declare that information provided in this project in this
project is true as per of my knowledge.



Thank you,

Yours faithfully

--------------------





ACKNOWLEDGEMENT



I would like to thanks all the people who helped me in
undertaking the study the completing the project,by imparting me
with valuable information and guidance that was required at every
stage of my project work.
First of all,I would like to thank our Principal Mrs Kamal
Balasubramanium, for giving me an opportunity and encouragement
to prepare the project .
Last bot not the least ,I would like to thank my project guide,
Prof. Pawar for guiding and helping me throughout the preparation of
my project, right from selection of the topic till its completion.













INDEX


Sr no. Topic Page no
1 Introduction 1
2 Rupee depreciation adding to inflationary
pressures
15
3 Impact of Rupee appreciation on Indian
Economy
18
4 Rupee plunge may blunt Indias inflation fight 28
5 Five aspects of Rupee depreciation to keep in
mind
37
6 Conclusion and bibliograhpy 40

INTRODUCTION

Indian currency (INR) has depreciated close to 22% in the last 1 year. In the
article we will try to study the concerns of a country facing depreciating
currency, the factors that led to this depreciation and the measures government
can take to stabilize the situation. Most importantly we will see if global
economic uncertainty rides over all the other domestic factors to determine
strength of a currency especially in developing economies.
Why dont we need a depreciating INR?
The persistent decline in rupee is a cause of concern. Depreciation leads to
imports becoming costlier which is a worry for India as it meets most of its oil
demand via imports. Apart from oil, prices of other imported commodities like
metals, gold etc will also rise pushing overall inflation higher. Even if prices of
global oil and commodities decline, the Indian consumers might not benefit as
depreciation will negate the impact. 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. Exchange rate risk also drives away foreign investors which in
turn depreciates the local currency. Indian Rupee is currently caught in this
vicious cycle; it will have to find a stable level to regain investors confidence.
The depreciating rupee has serious effects on the external debt figures of the
nation. The total external debt has increased by Rs. 2186.8 billion to Rs 16384.9
billion by the end of November 2011.
Factors that pushed INR into the well

Continued Global uncertainty: Owing to uncertainty prevailing in Europe and
slump in international market, investors prefer to stay away from risky
investments (flight to security). This has significantly affected the portfolio
investment in India. Credit rating agencys downgrade of India to BBB- with a
negative outlook, the last of the investment grade has not helped the cause. Any
outward flow of currency or decrease in investment will put a downward
pressure on exchange rate. This Global uncertainty has adversely impacted the
domestic factors (current and capital account etc.) and caused the depreciation
of rupee.
Current Account Deficit: While a country like China will be more than happy
with a depreciating currency, the same doesnt apply for India. China exports
more than it imports, thus a depreciating currency makes its exports cheaper in
the International market, in turn making China more competitive. India on the
other hand does not enjoy this luxury, mainly because of increasing demand of
oil, which constitutes a major portion of its import basket. The fall of oil price
to $90/barrel has helped India to fight the depreciating rupee up to some extent
but at the same time Euro zone, one of the major trading partners of India is
under severe economic crisis. This has significantly impacted Indian exports
because of reduced demand. Thus India continues to see current account deficit
of around 4.3%, depleting the forex reserve and thus depreciating INR.
Capital Account flows: Deficit countries need capital flows and surplus
countries generate capital outflows. India needs dollars to finance its current
account deficit. Institutional investors investing in India are directly impacted
by the global market uncertainty. In 2008 India had a net outflow of $14billion
of FIIs and INR depreciated from 39 level to 52 against dollar. A volatile
currency is never good for a foreign investor as it increases the transaction risk.
Thus the relation becomes a vicious cycle, thereby further magnifying the
volatility. Though RBI has intervened through open market operations to arrest
the downfall of INR (managed float) but the reserves of $290billion dont
provide enough room to make a significant impact.
Persistent inflation: India has experienced high inflation, above 8%, for almost
two years. If inflation becomes a prolonged one, it leads to overall worsening of
economic prospects and capital outflows and eventual depreciation of the
currency. The Real Effective Exchange Rate (REER) index (6 currencies- Euro,
Yen, Pound Sterling, US Dollar, Hongkong Dollar and Renminbi) has fallen by
13.84% during the last one year while the nominal rate has depreciated by 24%.
REER index measure includes the level of inflation differences across nations;
it reflects a country's competitiveness in international trade. Thus the trend
suggests that the country's competitiveness (measured by REER) has not
improved as much as the decline in nominal exchange rate points out mainly
because of increase in domestic costs. Under normal circumstances inflation is
tamed by increasing interest rates, but since India already has high interest rates,
it does not leave that option open, as it may lead to further slowdown in growth.
Interest Rate Difference: Higher real interest rates generally attract foreign
investment but due to slowdown in growth there is increasing pressure on RBI
to decrease the policy rates. Under such conditions foreign investors tend to stay
away from investing. This further affects the capital account flows of India and
puts a depreciating pressure on the currency.
Lack of reforms: Key policy reforms like Direct Tax Code (DTC) and Goods
and Service Tax (GST) have been in the pipe line for years. A retrospective tax
law (GAAR) has already earned a lot of flak from the business community.
Attempts are being made to control the subsidy bills but fiscal deficit continues
to hover around 5% of GDP. The government announced FDI in retail but had
to hold back amidst huge furore from both opposition and allies. This has
further made investors sentiment negative over the Indian economy.
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
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. And not using reserves to prevent currency depreciation poses the
risk that the exchange rate will spiral out of control. Since both outcomes are
undesirable, the appropriate policy response is to find a balance. Recent data
shows that RBI had indeed intervened by selling forex reserves selectively to
support Rupee.

Source:RBI
b. Raising Interest Rates: The rationale is to prevent sudden capital outflows
and ultimately lead to higher capital inflows. But Indias interest rates are
already higher than most countries. This was done to tame inflationary
expectations. So further raising interest rates would lead to lower growth levels.
c. Make Investments Attractive- Easing Capital Controls: RBI can take steps to
increase the supply of foreign currency by expanding market participation to
support Rupee. RBI can increase the FII limit on investment in government and
corporate debt instruments. It can invite long term FDI debt funds in
infrastructure sector. The ceiling for External Commercial Borrowings can be
enhanced to allow more ECB borrowings.
2. Measures by Government: Government should take some measures to bring
FDI and create a healthy environment for economic growth. Key policy reforms
that should be initiated includes rolling of Goods and Services Tax (GST),
Direct Tax Code (DTC), FDI in aviation and retail, Companies Bill and diesel
decontrol. Efforts should be made to invite FDI but much more needs to be
done especially after the holdback of retail FDI and recent criticisms of policy
paralysis. The government took steps recently to loosen rules for portfolio
investment in the Indian market, indicating its desire to sustain external inflows.
The measure to increase External Commercial Borrowings (ECB) to $10bn will
help in borrowing in dollar at a less cost. It may take similar steps to encourage
FDI as well, helping sustain external funding.
Is India the only loser?
The ongoing euro zone crisis and declining demand in the developed nations
has created risk-aversion in the markets. It explains why China's growth has
decelerated so acutely and also India's. It also tells us that it is the global factor
that is primarily responsible for India's economy running into rough weather not
coalition politics, lack of leadership, corruption, assembly elections or any of
the things we have been hearing about.

Source:www.x-rates.com
Above data shows that INR is not the only currency depreciating. Except for
China almost every developing country has shown a deprecating pressure on
their currency. Not everyone can be blamed for poor monetary policy or
ineffective governance.

Source:SEBI
The FII investment data for 2012 shows that India had huge capital inflows for
the first two months and started declining only after the euro zone crisis reared
its head again. This shows that the absence of reforms alone cannot account for
the sheer magnitude of the slowdown. The fact that we have had a comparable
slowdown only at the peak of the subprime crisis does suggest that external
conditions must be primarily responsible this time as well.
Through interest rate and inflation data we tried to formulate a model to
calculate expected spot rate and compared it with actual spot rates and it was
found that in 2010 and 2011 these rates were very close to each other, but in
2012 there is massive 20% difference(almost same as INR depreciation in last
year) in these rates.


Source: www.global-rates.com
INR appreciated by 2.69%, the biggest ever single day gain on 29th June just
after the announcement of Eurozone rescue plan by the leaders of 27 European
Union. All the above mentioned reasons are a testimony to the fact that global
economic factors are playing a bigger role than any domestic economic or
political condition.






Rupee depreciation adding to inflationary pressures: FM



The government, on Wednesday, maintained that even as it had been
taking a number of fiscal and administrative measures to contain the
price spiral, it was the rupee depreciation that had been contributing to
inflationary pressures.
The decline in the exchange rate value of the rupee makes imports
expensive. In situations where the higher cost is passed on to the
consumers, it would contribute to inflationary pressures and general
price rise, Finance Minister P. Chidambaram told the Lok Sabha in a
written reply.
Even as the rupee is now hovering around the 55.40-55.45 level against
the dollar, after having touched a record low of 57.32 on June 22, and the
WPI (wholesale price index) inflation also easing marginally to 7.25 per
cent in June from 7.55 per cent in the previous month, Mr.
Chidambaram said: The government has taken a number of fiscal and
administrative measures to check inflation, which resulted in
moderation of inflation to around 7-7.5 per cent in the recent months.
The decline in rupee value, the Finance Minister pointed out, was mainly
on account of supply-demand imbalance in the domestic foreign
exchange market.
This is due to widening trade and current account deficits and
slowdown in portfolio flows on account of escalation in euro crisis and
strengthening of the dollar in the international market, he said.
To stem the rupee slide, the government and the Reserve Bank of India
(RBI) had taken a number of steps to facilitate capital inflows, boost
exports and, thereby, augment the supply of foreign exchange into the
country. Among the steps taken were a hike in the FII investment limit
in debt securities, a higher interest rate ceiling for foreign currency NRI
deposits and deregulation of interest rates on rupee-denominated NRI
deposits.
In another written reply, Minister of State for Finance Namo Narain
Meena said The uncertainty in global financial markets due to recent
developments in the eurozone had some impact on India.
The government has been calibrating economic policies to mitigate the
impact.



















Impact of Rupee appreciation on Indian Economy


. Impact of Indian exports enjoyed the advantage of slow depreciation of
currency during the period of mid-2005 to mid-2006. Rupee showed a turn
around since August 2006. In terms of Real Effective Exchange Rate (REER), it
rose steadily between August to November 2006 and slipped slightly
thereafter. From March 2007 onwards, Rupee experienced a rise in its value.
As per REER (Graph 3.1), rupee has appreciated by almost 8% during March to
May 2007. Appreciation was much higher against US Dollar compared to Euro.
Another round of appreciation is visible between August-October 2007, which
has been relatively mild. REER provides the trade weighted average change in
exchange rate vis--vis major currencies. Hence, the appreciation rate as
reflected in REER provides a combined pictureof how Indian Rupee got
appreciated in recent times.
Rupee got depreciated during July to October 2005 and then February to
August 2006. In Rupee terms, monthly exports grew by 51% and in US Dollar
terms monthly exports growth rate was 41% during this period July to October
2005. In the entire period of 2005-06, exports grew by 23.44% in US Dollar
terms and touched US $ 103 billion. In terms of Rupee, growth was around
21.6% and total exports in 2005-06 were Rs.4.6 trillion. During the period
2006-07, Indias exports grew almost by 22.5% in US Dollar terms and total
exports reached to US$ 126 billion. In Rupee terms, growth was 25.3% and
total exports were Rs.5.7 trillionchanging values

of currency on exports has not been significant during 2005-06 and 2006-07 as
both the periods were marked by appreciation as well as depreciation of
currency which played an overall neutralizing role. Moreover, impact of
appreciation of Rupee on exports requires at least four to six months time to
get realized.
Since April 2007, as there has been sharp rise in the value of Rupee, there is a
severe impact on the export growth rate (Table 3.1). The cumulative exports
during the period April-October in 2005 was US $ 57 billion (Rs. 2.5 trillion)
which increased to US $ 71 billion and (Rs.3.2 trillion) in April-October of 2006
registering a growth rate of almost 24.4% in US Dollar terms (30% in Rupee
terms). The cumulative exports during April-October of 2007 have been US $
85.5 billion (Rs.3.5 trillion). In US Dollar term the growth was around 21% but
in Rupee terms the growth declined to only 7% implying a serious blow in
terms of rupee realization of Indian exports.
In case of imports, cumulative value of imports for the period April-October,
2007 was US $ 130 billion (Rs. 5.3 trillion) as against US$ 103.7 billion (Rs.
4.8 trillion) registering a growth of 25.31% in Dollar terms and 11.07% in
Rupee terms during the same period of 2006. The import growth rate for the
same period in 2006 over 2005 was 26% in US Dollar terms and 32% in Rupee
terms. Slowing down of import growth in 2007 has been mainly because of less
growth in POL import. This has proved that Indias import has not increased
significantly despite the fact that Indian rupee has appreciated significantly in
recent months. In fact, slowing down of import growth rate implies that Indias
import is less elastic with respect to exchange rate.
Currency Appreciation and Export Value: Recent Experience
In 2006-07, India witnessed large trade deficits to the tune of US $ 65 billion
and current account deficit was as high as US $ 10 billion. The level of trade
deficit should have been enough to depreciate the rupee, as supposed in
traditional exchange rate theories. However, interest rate cuts by the US
Federal Reserve led to higher inflow of portfolio investments into the country
resulting in unprecedented and continuous rupee appreciation. Foreign portfolio
investment recorded an inflow of US $ 20.7 billion during April-July 2007. FDI
inflow was also significantly high and recorded US $ 6.6 billion during April-July
2007 (US $ 3.7 billion in April-July 2006). Large inflow reflects expansion of
domestic activities, positive investment climate, and positive view towards
India as a long-term investment destination. All these have raised an upward
pressure on Indian Rupee (INR).
Table 3.1
Indias Exports vsi-a-vis Exchange Rates

Indias Exports to World Average Value
Period (Rs. Million) (US $ Million) Rs. Per Euro Rs. Per US $
Apr-Oct
2005
2,494,969 56,928 54.09 43.81
Apr-Oct
2006
3,250,912 70,838 58.03 45.86
Apr-Oct
2007
3,477,939 85,583 55.73 40.68
Source: Calculated from India Trades, CMIE
Rupee depreciated steadily for a decade after being floated in 1993, dropping
from an average annual rate of Rs. 31.37 per US Dollar in the 1993-94 fiscal
year (April-March) to Rs. 48.40 per US Dollar in 2002-03 (an average annual
depreciation of nearly 5%). From 2003-04 to 2005-06, however, the rupee
appreciated against the US Dollar by 3% on average a year. But the rate of
appreciation of Indian Rupee has been unprecedentedly high from July 2006 till
date, falling by about 16.3 % (46.97 to 39.25 per US Dollar). The average
rupee-US dollar rate in November 2007 was the lowest since 1999-2000.
On the other hand, though the Indian Rupee appreciated against Euro, Pound
Sterling and Yen also, the rate of appreciation has been much lower. Moreover,
the upward rallying of rupee against these currencies more or less leveled off
since May 2007, though there have been high fluctuations in weekly
movements. Against Euro, Indian Rupee shows a slight but steady depreciation
from July onwards. The trend of exchange rate vis--vis US Dollar and Euro is
given in Table 3.2 and Graph 3.2 and 3.3 below.
Table 3.2
Indias Exchange Rate

Source: Reserve Bank of India
Graph 3.2

Source: Monthly exchange rate available in India Trades, CMIE and RBI

Source: Monthly exchange rate available in India Trades, CMIE and RBI
The current upward rallying of Rupee evidently is a natural outcome of Indias
robust economic growth over the last decade. With low interest rates in US,
India and other emerging markets are becoming increasingly attractive as an
investment destination for US and other countries. As more and more Dollar
flows to India, its supply exceeds demand and result in depreciation against
Indian Rupee. As most of Indias trade is through US Dollar, continuous
appreciation of Indian Rupee against US Dollar has a significant impact on
exports. Exports through Euro were unable to balance the loss incurred in
exports earning through US Dollar.
Graph 3.4 below explains the dynamics of Indias export growth. Export values
in terms both Rupees and US Dollar are described in the diagram. Rupee
values are measured on the left hand vertical axis and values in US Dollar in
right hand axis. The average monthly growth (calculated through CAGR) of
exports during April-September in 2006 was 4.54% in US Dollar (5.08% in
Rupee terms). Higher growth in Rupee terms compared to US Dollar implies
the advantage of depreciated currency in realization of exports. The monthly
average growth rate during the same period of 2005 was 2.07% in US Dollar
(2.15% in Rupee). However, during 2007, though exports were growing but
decline in growth rate is very much visible. In the period April-September of
2007, Indian exports grew by 3% per month in US Dollar and in terms of
Rupee the rate was 2.15%. Lower growth rate in rupee terms compared to US
Dollar shows that due to appreciation, the export income in Rupee is slowing
down.
The growth of Indias exports in 2006 was both due to fast growth of world
exports as well as due to its depreciated currency. In 2006, according to WTO,
world export growth was around 8%. Export growth may slow down to 6% in
2007 due to moderate deceleration of World economic growth. Hence, slowing
down of Indian exports is also partially due to slow down of world demand in
2007 and not completely due to Rupee appreciation. Also it is important to
note many other currencies have shown the tendency of appreciation (Graph
3.5) and as a result competitive disadvantage of Indian exports due to
appreciated currency have also partially
neutralized. Some of these countries have given extra thrust in increasing
productivity and perhaps India is loosing its advantage due to that. The rise in
world merchandise exports in 2006 was also due to global inflation. Almost
40% of exports value was due to this price effect. As the world inflation slows
down, the extent of price effect will also come down in the export market. This
might have contributed to slow down of Indias export growth also.

Graph 3.5
Dollar changes vis--vis selected major currencies, 2001-2006
(Indices, January 2001=100)

a. Trade weighted currency basket of the Korean won, the Singapore dollar and
Chinese Taipei dollar.
Source : http ://www.wto.org/english/news_e/pres07_e/pr472_e.htm
Effect on Labour Intensive Exports
Rupee appreciation affects different sectors, differently. High-import intensity
sectors like automobiles, petroleum products, gems and jewellery, fare better
in face of a stronger rupee as appreciation renders their imported inputs to a
lower value. However, the appreciating rupee could significantly erode net
profit margin of low-import intensity sectors like textiles and leather, as
exporters of these sectors remain in a disadvantageous position especially in
price sensitive international markets. Many of the low-import intensity sectors
also operate with very low margins, making them feel the heat of rupee
appreciation more. The impact on employment is also directly related to the
factor intensity of production both in the export units as well as in the input
sector. An analysis of this is given in Table 3.3.
If the input sector is labour intensive and export units use largely imported
inputs, employment in input sector will get the hit as they will be replaced by
cheap foreign inputs. This implies that even though high import-intensity
sectors benefit from the appreciating rupee it does not necessarily mean that
in the longer run the economy, as a whole, will be benefited.
Continued rupee appreciation could have a long lasting impact on employment
as most low import-intensity sectors are highly labour-intensive and they lay
off labour quickly as rupee appreciation erodes their profitability. Also
Table 3.3
Impact of Rupee Appreciation on Exports and Employment


employment in import-competing industries may get hit later on. Job losses
were already reported in certain sectors, such as textiles and leather. The
strain on the labour market became visible ever since last year when number
of registered job seekers in the country shot up by more than 2 million to 41
million. Significantly, the increase came after two consecutive years of decline
in registered work applicants.














Rupee plunge may blunt Indias inflation fight



If the government and the Reserve Bank of India (RBI) were hoping that a high
base effect, which kicks in from December, would block the inflation spiral,
they may find their estimates going awry, yet again.
The rupees relentless slide vis-a-vis the US dollar is likely to fuel inflationary
pressures in the economy and weaken the central banks defences against high
prices as it offsets some of the moderating impact of last 21 months rate hikes
on domestic demand.
It (rupee fall) will be definitely blunt the high base impact. We will have to
rework the (inflation) numbers, as we had not taken this into account. We had
expected December inflation at 8.2%, but now it could be 8.5% because of the
rupee fall, said Abheek Barua, chief economist at HDFC Bank.
Going by a Yes Bank report, every 10% fall in the rupee is likely to lift the
inflation rate based on the wholesale price index (WPI) by 40 basis points.
Since November 1, the rupee has declined 5.5% against the greenback.
Traders have been buying the safe haven dollar amid the prolonged debt crisis
in the euro zone. Back home, demand for the greenback from oil companies,
major importers of crude oil, is further pulling the rupee down.
On the other hand, the headline inflation rate has remained above the 9% mark
since December last year. Latest data show WPI inflation was 9.73% in
October, compared with 9.72% in the previous month.
Both government and independent think tanks are of the view that the inflation
print for December could be sharply lower from the current level, as the index
had risen 1.53% month-on-month a year ago.
The December index had risen to 146.0 from 143.8 in November last year.
Thanks to this high base, inflation was widely seen slipping December onwards
towards the RBIs target of 7% by the end of the fiscal in March.
There could be a 1.00-1.25% fall in inflation in December from the current
level on the basis of the base effect, an economist at a private bank had
estimated.
December WPI inflation data will be released on January 16.
However, the rupees recent fallespecially if the downtrend sustainsholds
the potential to upset these calculations.
In its Macroeconomic and Monetary Development report in October, the RBI
had also acknowledged that the depreciation of the rupee raises the risk of
imported inflation.
The rupee has depreciated by about 11% against the dollar during 2011-12 so
far. Indias imports account for about 22% of GDP and depreciation of the
rupee raises the risk of imported inflation, the RBI had said in the October
report.
Rupee depreciation has already started to push up prices in some sectors like
automobile, consumer goods, and mobile phones. For instance, makers of
consumer durables have raised product prices by up to 10%, as their import
costs have gone up because of the rupees depreciation.
State-owned oil marketing companies, which sell diesel and cooking fuels at
government-controlled prices, are also piling up revenue losses as a falling
rupee is pushing up the cost of oil imports.
Every rupees fall against the dollar pushes up the combined gross revenue loss
for Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum
Corp Ltd by a staggering `8,000 crore.
The current years gross revenue loss of these oil companies is already pegged
at a massive `130,000 crore, and the government will now increasingly come
under pressure to bear at least a part of the jump in production costs.
The dwindling rupee may have further complicated the labyrinth of issues
facing the economy, but economists say easing commodity prices may be the
silver lining here.
The counter-impact of rupee depreciation on inflation could be the easing of
global commodity prices, Yes Bank said.
Prices of long steel futures on the National Commodity and Derivatives
Exchange have slipped about 3% so far this month. Iron and steel have a 6.36%
weight in the WPI basket.
From $103.37 per barrel on November 17, crude oil prices have eased to $97.26
today. Petroleum, crude and oil products have a 10.26% weight in the WPI
basket.
If a barrel of oil is currently at $100 with rupee at 48 to a dollar, its domestic
price will be 4,800 rupees. If the rupee falls to 50, the cost will rise to s5,000.
However, if, at the same time, the price of crude eases to $97, the price will
settle lower at Rs4,850 and negate the impact of rupee fall to an extent.
I dont think the rupee fall has overwhelming concerns yet, as we are seeing
falling commodity prices, said Robert Prior Wandesforde, chief India
economist at Credit Suisse.
Market participants dont expect the rupee to recover sharply in the near future,
as global concerns in Eurozone continue amid lack of strong intervention by the
RBI.
Last week, RBI deputy governor Subir Gokarn said market forces must
determine the level of the rupee, indicating that the central bank was not keen to
intervene in the currency market.
Gokarns comments at a juncture when the rupee was around 51 per dollar
level shows that the RBI is not extremely uncomfortable with the rupee at these
levels, and they may not intervene, said an economist at a private bank. NW18









Will the Rupee really appreciate in 2013?


The Indian currency was mostly unstable in the year gone by. The first two
months saw the rupee appreciating as the RBI took effective steps such as
banning the rollover of forward contracts and limiting the overnight positions in
currency.

This was assisted by strong capital inflows by the FIIsinto the country. However,
as the government remained politically inactive and charges of corruption
emerged almost consistently, the Indian currency spiraled down. Worries about
the high twin deficits also led the currency to depreciate by around 16% from
the beginning of March to mid of June.

The situation improved with a slew of reforms in the third quarter. This helped
in arresting the fall in rupee. Increasing the FDI limits in sectors such as retail
and aviation and reduction in the diesel subsidy were the domestic measures
taken by the Indian government. The Federal Reserve's decision to continue
injecting liquidity led foreign funds into the country thereby improving demand
for rupee. This situation was though short-lived. With the finance
minister failing to come up with a proper guidance on restricting the fiscal
deficit to 5.3%, once again the rupee showed weakness and wiped off the gains
in the third quarter.

So, would the current year be positive for rupee or would it continue to
depreciate further? The answers to these questions hinge on the movement
of interest rates and how successfully the twin deficits are dealt with. Though
in the near term interest rates are expected to be benign to
encourage investments in the economy, there is an uncertainty looming large
over how the government deals with twin deficits.

One of the biggest determinants in the movement of the domestic currency will
be the stance taken by the RBI. The central government has been keeping a tight
position on the Repo rate in the wake of high inflation. With the
latest inflation numbers showing positive signs the RBI is expected to pay heed
to the flagging growth rate. Most of the analysts in the street expect a rate cut in
the next RBI monetary review.

The fall in rates will surely lead to lower foreign investments in the
debt market but this will be made up by the investments in the equity market.
With lower interest rates, the investment cycle will see a fresh upturn and will
bring relief to major sectors such as capital goods, infrastructure and realty,
which are currently under stress. To put it simply, reduction in interest rates will
set India again on the growth platform.

Revenue growth of TCS, Infosys, Wipro, HCL to remain
modest: Analysts
An average estimation based on the forecasts of five brokerages and projection
of the ET Intelligence Group, revenue for the top four IT players is expected to
increase by 2.6% sequentially and by 15% from the year ago. Net profit is likely
to fall by 2.5% from the quarter ago and to increase by 12% year-on-year. The
sample includes TCSBSE 0.60 %, Infosys, WiproBSE -1.46 %, and HCL
TechnologiesBSE 1.00 %.

"We expect a modest, flat to (around) 3%, sequential dollar denominated
revenue growth in the December quarter, due to fewer working days and client
specific challenges", mentioned Mital Ghosh and Kunal Tayal from Bank of
America Merrill Lynch in a recent report. According to them, cuts in
discretionary spends highlighted by some vendors may impact the demand for
the quarter.

Profit margins are expected to remain under pressure compared with the
previous quarter. IDFCBSE -1.69 %mentioned in its report that margins are
likely to remain in a narrow range of 50 basis points for large cap IT players
with no major triggers.

Barring Wipro, other three players are likely to report a sequential drop in net
profit for the December quarter. The loss of Infosys, the second largest among
publicly listed IT players in the country, is expected to be the highest at 7% with
Rs 2,203.7 crore in net profit. Wipro, on the other hand, is expected to report
1.1% sequential increase in net profit at Rs 1,628 crore.

Analysts expect a cautiously optimistic commentary from IT exporters on
demand scenario in 2013. "Vendors could benefit from pent-up demand for
transformationrelated IT spend and likely faster decision cycles post US
Presidential elections.However, clients are proceeding cautiously stage by stage
resulting in smallerprojects sizes, lower visibility and delayed decisions,"
mentioned Bank of America Merrill Lynch in the report.






The value of any currency in an economy is hard to bet, to be stable for a long
period of time as there are number of factor influencing its appreciation and the
depreciation. The currency value of an economy influences the growth rate of
GDP in an economy. Several other factors that have a direct influence on the
over or the undervaluation of a currency are listed below:
Capital flows and the stock market of India
It's important to note that in spite of suffering recession, an economy can grow
if the capital inflow is constant or continuously rising. In India even if the GDP
rate is less, the currency can still get overvalued due to excessive capital inflows
made by the FII's in the Indian economy.

Global currency trends
Like many other currencies Indian rupee have also tied its knot with some of the
big economies of the world including the names of UK, US, Japan and Canada.
The depreciation or appreciation in the currency any of these, especially in the
US dollar, influences the valuation of the Indian currency in one way or the
other.

RBI Intervention
The valuation of the Indian currency highly depends on RBI that manages the
'balance of payments', slight modification in which can define the over or the
under valuation of the Indian currency.

Oil factors
India is a major importer of oil and the valuation of Indian money gets easily
affected by the increase in the prices of the crude oil. It can further result in
spreading inflation in an economy due to the over valuation of the Indian
currency.

Political factors
Several other factors that affect the currency stability are some political factors
like change in the government set up, introduction of new export and import
policies, tax rates
and many more.











Five aspects of Rupee depreciation to
keep in mind



A lot of the downward pressure thats been on the Rupee in the past few months
has been due to the political environment in the country, and the uncertainty
caused by issues like GAAR, retrospective taxation, inability to pass any policy
reforms and other clouds surrounding the Indian economy.
Unlike the last time the Rupee depreciated which was a time of global crisis,
things arent as bad globally this time, and most of the trouble thats brewing is
domestic (although things arent peachy globally either).
These circumstances hardly inspire investor confidence and as a result money
has been flowing out of Indian equities and thats led to the downfall in the
market.
Effect of Rupee depreciation on exporters
If you look at exporters specifically, then all other things being equal, Rupee
depreciation is good for them as the conversion rate is higher but the problem is
that all other things arent equal and they have to face a slowing market in
Europe and US, and that means that business is slowing down for them there.
The recent Cognizant 2012 guidance, and the drop in share prices of all IT firms
subsequently is a good example of that.
Effect of Rupee depreciation on oil bill
This one is the most talked about and Im sure everyone has heard about this.
Since India imports most of its oil from abroad, every time oil prices shoot up,
Indias oil bill shoots up and since the government subsidizes oil, the oil subsidy
goes up with this.
A lesser known aspect of this is that India has actually got surplus refining
capacity, and oil also happens to be Indias biggest export item. While there are
price controls in the domestic market, refiners are free to sell at market rates
internationally, and thats led to big oil exports from Indian private oil players,
and helps offset some of the big oil bill. In fact in an earlier post about Indias
exports in 3 simple charts I spoke of how oil exports might just hold the key to a
trade surplus one day.
Effect of Rupee depreciation of Indian funds that hold US assets
Currently, I think there is just one fund in India which is the MOSt Shares
Nasdaq 100 ETF which is a practical option to get exposure to the US markets,
and this fund has grown about 20% Year to Date but the underlying NASDAQ
has just grown 12.6% in that time period.
The remaining gains are due to the depreciating rupee as the stocks that the fund
owns are worth more in Rupees now than they were when the fund bought
them.
This is a slightly more complex relationship and you cant really say that Rupee
depreciation will always be good for the fund because the other variables that
this depends on is how much money flows in the fund at that price level, what
kind of redemption takes place at various levels, and how much the fund owns
at any given time. I have however seen that the a falling Rupee is good for such
funds, and I think if a fund continues to grow its asset under management
steadily this would remain true.
Effect of Rupee depreciation on companies that have borrowed in USD
This could potentially become a big problem because a lot of Indian companies
borrowed in foreign currency to take advantage of the low interest rates, but
didnt sufficiently hedge to protect themselves against the adverse exchange rate
movement that could take place.
Now, they will have to spend a lot more INR to buy the same level of USD they
borrowed and not only will this nullify any interest rate savings that they may
have benefited from, it will put a big dent on their resources because this is akin
to a penalty on the loan.
These are 5 things that come to my mind when I think about Rupee depreciation
and these are not necessarily the five most important ones, just the ones that
came to my mind as I read the original question.











Conclusion
The Indian Rupee has depreciated significantly against the US Dollar marking a
new risk for Indian economy. Grim global economic outlook along with high
inflation, widening current account deficit and FII outflows have contributed to
this fall. RBI has responded with timely interventions by selling dollars
intermittently. But in times of global uncertainty, investors prefer USD as a safe
haven. To attract investments, RBI can ease capital controls by increasing the
FII limit on investment in government and corporate debt instruments and
introduce higher ceilings in ECBs. Government can create a stable political and
economic environment. However, a lot depends on the Global economic
outlook and the future of Eurozone which will determine the future of INR.











BIBLIOGRAPHY



Rupee depreciation impact on inflation .
Thomas Oatley, International Political Economy: Interests and
Institutions in the Global Economy (Harlow: Longman, 2007), p. 104

Bhagwati, Jagdish, 1988, Export-Promoting Trade Strategy:
Issues and Evidence, Research Observer 3(1), January 27-57.

http://articles.economictimes.indiatimes.com

http://www.fao.org

http://www.amosweb.com