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DEPRECIATION OF THE INDIAN CURRENCY

IMPLICATIONS FOR THE INDIAN ECONOMY


The Indian currency depreciated more than 20 per cent in 2008 and even breached the crucial 50-level mark against the greenback on sustained dollar purchases by foreign banks and a strong dollar overseas. There were several consequences of the falling Indian rupee with mixed effects on the Indian economy. While exports rose, so too did the costs of imported goods, capitalintensive projects and dollar loans taken by companies, which increased the foreign debt. Overall, economic growth slowed down as interest rates rose and foreign institutional investment flows ebbed. 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 from a weaker rupee.

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he Indian currency has gone through drastic changes in the recent past. The sudden upsurge in the value of the rupee (Rs) at the close of the 20067 financial year, which took most market players by surprise and made it one of the best performing Asian units, lost ground and the rupee suffered one of its steepest slides against the greenback in the following year. On April 16, 2007, the rupee quoted a nine-year high against the US dollar at 41.86. Surprisingly at the end of May 2007, the dollar strengthened quite significantly against almost all currencies, but failed to impress the rupee. By mid-October 2007, the Indian rupee had appreciated by 20 per cent from Rs 49 a dollar in 2002 to Rs 39 a dollar. Most of the appreciation (11 per cent) occurred after March 2007 (Sumanjeet Singh, Appreciation of the Indian Currency: Implications for the Indian Economy,

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World Affairs: The Journal of International Issues, Vol 11, No 4, pp 5269, Winter 2007). While economists and experts predicted an even stronger rupee in 2008, the trend reversed at the beginning of the year. The rupee depreciated more than 20 per cent in 2008. Currency depreciation is the loss of value of a countrys currency with respect to one or more foreign reference currencies, typically in a By mid-October 2007, the floating exchange rate system. It is Indian rupee had appreciated by usually used to denote the unofficial 20 per cent from Rs 49 a dollar increase of the exchange rate due to in 2002 to Rs 39 a dollar. While market forces, though sometimes it economists and experts predicted appears interchangeable with an even stronger rupee in 2008, devaluation. Its opposite is called the trend reversed at the appreciation. The massive 20 per cent beginning of the year. The rupee depreciation in the last fiscal year against depreciated more than 20 per the dollar can be divided into four cent in 2008. distinct phases. In April 2008, the rupee dollar exchange rate hovered around 40; end-April to mid-May 2008, with a sharp depreciation of 5 per cent the rupee reached around 42 within two weeks; midMay to August 2008 the rupee remained at around 423 and after August 2008, it depreciated more than 11 per cent until the latter half of October 2008 (Graph 1). Graph 1: Depreciation of the Indian Rupee against the US Dollar, JanuaryOctober 2008

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On October 17, 2008, the Indian rupee fell to its lowest in more than 6 years. On June 25, 2002, it was at 48.8775 and on October 17, 2008, it was again at 48.88. On October 22, 2008, the rupee On October 24, 2008, the rupee fell to 49.50, at which point it had fallen breached the crucial 50-level 20.4 per cent in 2008. On October 24, mark against the greenback on 2008, the rupee breached the crucial 50sustained dollar purchases by level mark against the greenback on foreign banks and a strong dollar sustained dollar purchases by foreign overseas. It tumbled to 50.05 banks and a strong dollar overseas. It ahead of the Reserve Bank of tumbled to 50.05 ahead of the Reserve Indias mid-term review of the Bank of Indias (RBI) mid-term review of the monetary policy 20089. The monetary policy. policys highlights were as follows: 1. The cash reserve ratio remained unchanged at 6.5 per cent. 2. Repo and reverse repo rates remained unchanged at 8 and 6 per cent respectively. 3. Bank rates remained unchanged at 6 per cent. 4. Gross domestic product projections were lowered to 7.58 per cent for the 2009 financial year. 5. Inflation was to be brought down to 7 per cent by March 2009. 6. RBI aimed to bring inflation down to 5 per cent at the earliest. 7. The medium term inflation target was 3 per cent. 8. Double digit inflation was still regarded as a matter of concern. 9. An infusion was made to ensure enough liquidity in the banking system. While the rupee depreciated against the dollar more than most other Asian currencies in 2008 (Table 1), it also depreciated against other strong currencies like the euro and the yen. On January 1, 2008, the Indian rupee opened at 57.51 and 35.29 against the euro and 100 yens respectively and reached 67.95 and 43.85 respectively on September 26, 2008, a decrease of more than 15 per cent since the beginning of the year.

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Table 1: Select Asian Currencies against the Dollar


Select Asian Countries Korean Won Thai Baht Indian Rupee Malaysian Ringgit Indonesian Rupiah Singapore Dollar Hong Kong Dollar Taiwan Dollar Japanese Yen
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Value of Currency January 2008 September 11, 2008 Per Cent Change 936.95 1109.20 24.77 29.75 34.78 18.38 39.44 45.53 16.91 3.31 3.47 15.45 9368.00 9440.00 4.83 1.44 1.45 .54 7.81 7.80 .17 32.45 32.08 1.67 109.66 106.58 1.16

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CAUSES OF THE DEPRECIATION OF THE INDIAN RUPEE

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s the Indian currency sharply depreciated not only against the dollar, but also against other world currencies, it is imperative to understand the factors contributing to its fall in the global market. A myriad of factors can cause currency depreciationseconomic, political, the prevalence of corruption, etc. Some factors require greater attention and should be analysed objectively. There were four key factors behind the depreciation of the Indian rupee: 1. The flight of foreign funds from the Indian market. 2. The slowdown in capital inflows, which decreased the supply of dollars. 3. The higher global crude oil prices, which widened the current account deficit and increased dollar buying by oil companies. 4. The recovery of the dollar. The main reason behind the falling rupee was the flight of foreign funds from the Indian market. From May to August 2008, foreign exchange (forex) reserves The main reason behind the fell by $ 25.87 billion taking into falling rupee was the flight of account the actual position and effect foreign funds from the Indian of the appreciation and depreciation of market. Forex reserves peaked at non-US currencies, like the euro, the $ 316.17 billion in May 2008 pound sterling and the yen, held in but fell continuously thereafter. reserve. Between September 26 and 151

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October 24, 2008, forex reserves fell by $ 33.4 billion as the RBI intervened heavily in forex markets to supply dollars. Forex reserves peaked at $ 316.17 billion in May 2008 (Graph 2) but fell continuously thereafter. Forex reserves dipped by $ 15.4 billion for the week ending October 24, 2008 to touch $ 258.4 billion.
Graph 2: Fall in the Foreign Exchange Reserves of India

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Another reason for the depletion (apart from the revaluation of the dollar against other international currencies) was the net sale in equity markets by foreign funds, which sold equity worth $ 500 million on October 10, 2008. There was fear and panic on the Indian stock market as bourses suffered heavy losses on the back of global sell-offs and on data showing The barometer index Sensex fell dismal industrial production growth in 9,759.13 points or 48.1 per cent August 2008. On October 10, 2008, in the first three quarters of 2008 the BSE 30-share Sensex ended down from its close of 20,286.99 on 800.51 points or 7.07 per cent at December 31, 2007. Net sales 10,527.86. The index plunged 1,088.50 by FIIs amounted to $ 932.8 points at the days low of 10,239.76 at million in September 2008 and the onset of the trading session, its $ 13.00 billion during the year. lowest level since July 24, 2006. The Sensex fell 424.33 points from the days high of 10,904.13, in early trade. The Standard & Poors Crisil National Stock Exchange Index 50 (Nifty) fell 233.70 points or 6.65 per cent to 3,279.95. The Nifty hit a low of 3,198.95 in early trade, its lowest level since August 9, 2006. 152
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From the high of 13,055.67 on October 1, 2008, the Sensex lost 2,527.81 points or 19.36 per cent. The barometer index Sensex fell 9,759.13 points or 48.1 per cent in the first three quarters of 2008 from its close of 20,286.99 on December 31, 2007. It was 10,678.91 points or 50.35 per cent below its all-time high of 21,206.77 on January 10, 2008 (Graph 3). This was one of the highest single day liquidations of equities by foreign institutional investors (FIIs). FIIs stepped up selling from the beginning of September 2008 as major investment banks and other financial firms such as Lehman Brothers and Merrill Lynch plunged into deep trouble, followed by others such as the American Insurance Group, Morgan Stanley and Goldman Sachs. According to the Securities and Exchange Board of India (SEBI), net sales by FIIs amounted to $ 932.8 million in September 2008 and $ 13.00 billion during the year.
Graph 3: Performance of the Indian Stock Market in 2008

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Further, the demand for the rupee dipped, as capital inflows decreased due to the global financial crisis (Shalini S Dagar, Economy in Eclipse, Business Today, Vol 17, No 22, pp 826, November 2, 2008). The quantum of FII money in the Indian stock market plays a significant role in the movement of the exchange rate. In the last few years, despite the trade deficit, the value of the Indian currency had risen mainly due to the surge in FII inflows into the country. A decline in external
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commercial borrowings (ECBs) was another reason behind the rupees depreciation. In 2007, the RBI tightened norms, restricting the use of ECB funds for rupee expenditure on capital goods, new projects and modernisation and expansion in the manufacturing and infrastructure sector. As per its directive, ECB money could be used for rupee expenditure up to $ 20 million and only after gaining the RBIs permission. The $ 20 million restriction The total funds raised through was later relaxed to $ 100 million. As ECBs by companies in India per a study of the Associated Chambers declined substantially from of Commerce and Industry of India, the $ 11.85 billion in AprilJuly total funds raised through ECBs by 20078 to $ 6.53 billion in the companies in India declined corresponding period of 20089, substantially from $ 11.85 billion in recording a negative growth rate AprilJuly 20078 to $ 6.53 billion in the corresponding period of 20089, of 44.95 per cent. recording a negative growth rate of 44.95 per cent. The study also showed a decline in companies raising capital through ECBs by 54.29 per cent from 280 companies in the first four months in the last but one fiscal to 128 in the corresponding period in the last financial year. The deficit in the current account of the countrys balance of payments widened further as the oil import bill (one of the key factors leading to the rupees depreciation is the impact of high crude prices on the merchandise account) grew faster than income from software services exports and remittances from the Indian diaspora. Figures released by the RBI indicated that the current account deficit amounted to $ 10.72 billion during the quarter ended June 2008 as compared to a deficit of $ 6.3 billion in the same quarter of the previous year. The current account in the balance of payments measures the net position of a countrys exports and imports of goods and services. The deficit was despite the surplus in invisibles (services income and remittances among others) being higher at $ 20.8 billion ($ 14.4 billion) to absorb the trade deficit of $ 31.6.79 billion ($ 20.7 billion) during the quarter. While oil imports recorded a significant growth of 50.4 per cent in the first quarter (Q1) of 20089 (23.9 per cent in Q1 of 20078), non-oil imports showed a relatively modest growth of 20.9 per cent (45.1 per cent in Q1 of 20078). The RBI said that the sharp increase in the value of oil imports reflected the impact of 154
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increasing oil prices of the Indian basket of international crude (a mix of Oman, Dubai and Brent varieties), which increased to $ 118.8 per barrel in Q1 of 20089 from $ 66.4 per barrel in the corresponding quarter of the previous year. Another factor for the falling rupee was the general strengthening of the dollar against major global currencies like the euro and the pound as well as against many emerging and developing market currencies. The appreciation or depreciation of currencies is influenced by the strengths and weaknesses of competitive currencies. After a sharp depreciation of the dollar in the second quarter of 2008, it recovered significantly and in the third quarter gained strength against most major currencies setting a new high for the year against the euro. Part of the dollars strength was tied to the settlement of $ 400 billion of the Lehman Brothers credit default swaps with the euro and the sterling (Rishi Joshi, The Rupee Conundrum: Is India Inc Prepared to Deal with the Volatility in the Indian Currency?, Business Today, Vol 17, No 21, pp 234, October 19, 2008). The yen however, proved to be While oil imports recorded a the exception, as it continued to benefit significant growth of 50.4 per from the weakness in the euro and other cent in the first quarter (Q1) of crosses. Towards the end of 2008, the 20089 (23.9 per cent in Q1 of dollar was down 0.79 to 101.07 against 20078), non-oil imports the yen, while against the dollar, the euro showed a relatively modest was down 0.0165 to 1.3179 and the growth of 20.9 per cent (45.1 pound sterling was down 0.0195 to per cent in Q1 of 20078). 1.6959. The dollar also gained 0.0173 to 1.2084 against the Canadian dollar, with its session high of 1.2138 corresponding to a new three-year low. The loonie was sold off in a dramatic fashion after the Bank of Canada opted to cut interest rates to 2.25 per cent. There is also a relationship between high inflation and the depreciation of a currency. Generally, high inflation and uncertainty about future inflation discourage investments and savings. As high inflation raises uncertainty in the economy, it also leads to lower equity values. This was one of the reasons for the Indian stock markets almost daily decline in 2008. On October 27, 2008, the Indian stock market crashed, with the benchmark Sensex plunging below the psychosocial 8,000 level. According to a list of positions of Indian securities lent overseas by FIIs as on
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October 9, 2008, issued by SEBI on October 31, 2008, the stocks in which FIIs had lent the largest quantity of shares were among the worst affected in the stock market slide. Tracking the weak global trend (Table 2), the benchmark Sensex lost over 750 points to hit an over three-year low of 7,9397,939.02, a level last seen on November 2, 2005. A comparison of benchmark indices indicates that while investors across the globe suffered, those in emerging markets suffered more than in the developed world. In October 2008, Brazil Bovespa lost almost 25 per cent; Russias RTS shed 36 per cent; Indias 30-share Sensex fell close to 24 per cent and the broader Nifty almost 27 per cent; Koreas Kospi came down 24.6 per cent while the Dubai Financial Market dropped more than 28 per cent. The fall was less stark in developed markets. The Dow Jones Industrial Average shed 15 per cent in October 2008; Nasdaq fell 18 per cent; Londons FTSE dropped 13.4 per cent, Germanys DAX lost 16 per cent; Australias ASX 200 came down 12.6 per cent and Japans Nikkei and Hong Kongs Hang Seng declined High inflation and uncertainty 20 per cent each. When the going was about future inflation discourage good until December 2007, the investments and savings. As high emerging markets had topped the list inflation raises uncertainty in the of gainers. In 2007, the Bovespa, RTS, economy, it also leads to lower Sensex, Kospi and Chinas Shanghai equity values. This was one of Composite, had risen between 20 per the reasons for the Indian stock cent and 97 per cent, whereas markets markets almost daily decline in such as Hang Seng, Dow Jones, Nikkei and FTSE had posted returns between 2008. 11 per cent and 39 per cent. (Tania K Jaleel, Emerging Markets Most Hurt in Bear Run, The Businessline, October 31, 2008). In short, the stock market became a moving target, constantly shifting downwards as sellers desperately dumped stocks. The declining Indian stock market thus became associated with the flight of foreign funds. Further, the high prices of wheat and palm oil inflated the import bill, which was already under stress due to soaring crude prices in the international market. Last but not the least, were the policies of the RBI. Generally, the RBI intervenes in the Indian currency market whenever the rupee exhibits signs of extreme volatility. 156
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Although the exchange rate system in India is supposed to be a full float, the RBI intervenes at regular intervals to direct movement in rupee values (managed float). The intervention by the RBI in the market can be passive (off-market deals) or active (dollar buying/selling). Intervention can also be made through statements (to the press or otherwise) in times of exchange rate crises, or in extreme circumstances, through a package of monetary and other measures. Thus, in comparison to currencies like the dollar and the euro, which are determined by market movements, the Indian rupee is partially managed by the RBI. The balance of payment crisis in the 1990s, when the rupee was devalued was a case in point.
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Table 2: Bear Assault in Emerging Markets


Name of Index RTS DFM Nifty Sensex Bovespa Kospi Hang Seng Nikkei Nasdaq DAX Dow Jones FTSE ASX October 30, 2008 758.71 2942.03 2885.60 9788.60 37449.00 1084.72 14329.85 9020.76 1698.52 4869.30 9180.69 4291.60 4018.00 Per Cent Fall 36.00 28.70 26.90 25.02 24.70 24.60 21.30 20.50 17.90 16.10 15.20 13.40 12.60

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The devaluation of the rupee in 1991 by about 22 per cent brought about a sharp drop in its value against the dollar. The decline was hardly surprising, given the great strain on the economy during the 1990s, when the external account perilously reached breaking point. A host of factors, including the domestic political crises and an increase in oil prices, contributed to the decline in the rupees value. Indias credit rating was downgraded twice (with the second downgrade placing the country in the speculative grade) and with instalment payments against some foreign loans coming due, the economy nearly collapsed.
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CONSEQUENCES OF THE DEPRECIATION OF THE RUPEE

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here were several consequences of the falling Indian rupee with mixed effects on the Indian economy. While exports rose, so too did the costs of imported goods, capital-intensive projects and dollar loans taken by companies, which increased the foreign debt. Overall, economic growth slowed down as interest rates rose and FII flows ebbed. The first impact of the devaluation of the currency was the stimulation of merchandise exports, particularly in the textiles, leathers and handicrafts sectors, which had been reeling under the impact of a rising rupee. The falling rupee brought relief as traditional markets in the United States (US) and Europe slowed down. According to industry estimates, about 25 per cent of orders booked at the end of 2008 were due to the currency advantage Indian companies enjoyed over other countries like China. Amid the global meltdown, Indias export oriented commodities continued to perform well, as shown by the prices of cotton, sugar and sesame seed. However, prices of commodities like base metals, precious metals, edible oils and crude continued to move in tandem with international prices (Table 3).
Table 3: Performance of Various Export Oriented Commodities
Commodities Cotton Shankar (Rs/Qtl) Sugar M30 (Rs/Qtl) Sesame Seed (Rs/Qtl) Ground Nut Oil (Rs/10 Kg) Refined Soya Oil (Rs/10 Kg) Copper ($/Tonne) Aluminium ($/Tonne) Zinc ($/Tonne) Lead ($/Tonne) Nickel ($/Tonne) Brent Crude ($/bbl) Gold (Rs/10 gms) Gold London ($/oz) US Dollar November 8, 2007 5343.00 1452.50 3500.00 650.00 505.00 7021.00 2565.00 2720.00 3505.00 32100.00 93.24 10605.00 841.10 39.33 October 27, 2008 6327.00 1847.50 6550.00 610.00 338.00 3721.00 1876.00 1062.00 1140.00 8810.00 59.20 11855.00 723.09 49.87 Per Cent Change 18.42 27.19 87.14 -6.15 -5.94 -47.00 -26.86 -60.93 -67.47 -72.55 -36.71 11.79 -14.03 -26.80

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Export-oriented sectors like information technology (IT) and auto components gained (CNM Lavanya, The Impact of Rupee Depreciation, The Hindu, November 2, 2008). Technology is among the more sensitive sectors, with a close relation to the rupeedollar movement. Hence, the decline in the rupee value was good news and information technology companies top lines moved higher as they earned more rupees per dollar. In 2006, when the rupee depreciated these About 25 per cent of orders companies, had made the most of it. booked at the end of 2008 were They also put systems in place to hedge due to the currency advantage the inherent risks from forex earnings. Indian companies enjoyed over With over 90 per cent of the revenue of other countries like China. Amid IT companies coming from abroad, the the global meltdown, Indias rupees downward trend over the first export oriented commodities three quarters of 2008 boosted the continued to perform well. power packed results of the sector. A case in point, were the June quarter results of 2008, which were in line with good quarters. On average, a one per cent depreciation in the rupee boosts the operating margins of the Indian IT sector by 2530 basis points. Some of these gains however, were offset by hedging. According to the Society of Indian Automobile Manufacturers (SIMA), Hyundai, Indias largest car exporter witnessed a growth of 25.03 per cent at 1,44,439 units in 20078. Maruti, a distant second, registered an increase of 31.49 per cent in exports in the same fiscal at 51,669 units. The companys exports for April and May 2008 grew by 48.68 per cent at 7,654 units. Table 4 indicates the export growth of the automobile sector. However, this growth was due not only to the depreciation of the rupee, but also to the rising demand for Indian vehicles in overseas markets. It must be mentioned, however, that not all was smooth sailing for auto exporters. They have had to contend with clients wanting to renegotiate contracts due to the softening of the rupee. In many cases, 2025 per cent of exchange rate gains have been passed on to clients. Overall, however, exports made impressive growths of 25 per cent, touching almost $ 200 billion. This rise gave a boost to economic growth.

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Table 4: Total Automobile Exports 20078


Vehicles Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers Total Source: SIAM 2007 1,03,117 10,724 68,728 4,09,038 6,07,915 2008 1,57,611 9,487 69,879 5,19,684 7,74,368 Growth in Per Cent 52.76 -11.53 1.67 27.05 27.38

While a falling currency makes exports competitive, it makes imports costlier. Theoretically, this should curb imports and improve the trade balance. However, imports of commodities like oil, whose demand is relatively inelastic, negate this possibility (Table 5). Indian industries dependent on imported raw materials for industrial and capital goods and components have had their access to many advanced countries blocked by quotas and tariffs. Rising prices of such inputs through devaluation raise industrial costs and reduce the intensity of capacity utilisation. According to industry sources, the import of Chinese tyres for commercial vehicles fell by approximately 30 per cent from 150,000 to 105,000 tyres a month during JanuaryJune 2008. The fall was attributed to a sharp depreciation of the rupee against the dollar. Imports of radial tyres fell by 120,000 tyres to a mere 90,000 a month. Imports of cross-ply or bias tyres dropped approximately 30,000 to 15,000 a month. The falling rupee hurt Maruti Suzuki, the countrys biggest producer of passenger cars, as its slated imports increased by about Rs 2,000 crore for auto parts.

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Table 5: Indias Trade with Asian Countries (in $ billion)


Time Frame 20034 20045 20056 20067 20078 Exports 5.82 8.42 10.41 12.60 16.37 Imports 7.40 9.11 10.88 18.08 22.66

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A major drawback of the depreciation in the value of the rupee was the increase in the burden of servicing and repaying the governments foreign debt (dollar denominated) and the debt of companies that raised dollar denominated debts. For instance, if a debtor had borrowed $ 100 when the exchange rate was Rs 45 to a dollar, the original debt would have stood at Rs 4,500. After the rupees depreciation to Rs 48 a dollar, the same loan amount would have risen to Rs 4,800. If the interest rate was 10 per cent, the additional interest would be Rs 30, an addition of 0.67 per dollar borrowed (30/45). Thus, the rupees depreciation would result in an incremental outflow of $ 7.34 (6.67+0.67) for the debtor. This drawback was amplified in the case of short-term debt as the burden was Overall, exports made impressive immediately felt. Most corporate loans growths of 25 per cent, touching are denominated in dollars and the almost $ 200 billion. This rise rupees significant depreciation against gave a boost to economic growth. the dollar, resulted in many companies reporting losses. Notwithstanding the increase in sales, tractor and utility vehicle major Mahindra posted a 21 per cent drop in net profits at Rs 227 crore for the quarter ended on September 30, 2008. The lower profits were largely on account of forex losses of Rs 117.8 crore, due to the depreciated rupee. The exchange loss included a notional loss of Rs 96.7 crore because of the revaluation of the companys net foreign currency borrowings. Bharat Petroleum Corporation Limited also suffered an exchange rate loss of Rs 714 crore during the same quarter. Even though the average price for Brent crude for the second quarter of 2008 had been $ 116 a barrel, according to analysts, the benefit of lower crude prices was nullified by the weakening rupee. The Oil and Natural Gas Corporation reported a 6 per cent dip in net profits from the fallen rupee. Due to a Rs 81.57 crore hit on account of the resettlement of foreign currency loans, Orchid Chemicals and Pharmaceutical reported a loss of Rs 40.66 crore for the JulySeptember 2008 quarter. Ranbaxy posted a $ 73 million loss of its foreign currency debt because of the adverse movement of the rupee and wrote down the value of its inventories by $ 57 million after the US imposed an import ban. Tata Motors recorded a forex loss of Rs 285.02 crore on revaluation of foreign currency borrowings, deposits and loans,

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which significantly eroded its margins. This was also true of Jubilant Organosys and Bicon. Another fallout of a weaker rupee was higher interest rates in the economy, which the RBI (government) used to fight off the pressure of the depreciation in the value of the domestic currency. Higher interest rates deterred investment expenditures, which in turn adversely effected growth both in the short and long run, as the creation of new capacity was stunted (Shriram Iyer, The Rupee is Likely to Strengthen, The Economic Most corporate loans are Times, September 19, 2008). With denominated in dollars and the respect to the depreciation, the rupees significant depreciation government was placed in a damned if against the dollar, resulted in you do, damned if you dont situation. many companies reporting This was reinforced by the compulsion to raise petroleum prices, which had its losses. own constraining effects on growth. Further, the weaker currency also led to repatriations by FIIs (Calvo G Reinhart, When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options, International Monetary Fund, 2000, available at, http://www.lib.umd.edu). FIIs are permitted to transfer money in and out of the country at will and therefore a legitimate fear of a large fall in the value of the currency, made many repatriate funds. This resulted in a sell-off in the capital market (Srikanth Srinivas, Will Loose Mean Tight?, Businessworld, Vol 28, No 24, p 22, October 27, 2008). Table 6 shows FIIs data since 2003.
Table 6: FIIs Data Since 2003 Year 2003 2004 2005 2006 2007 October 9, 2008 November 1, 2008 FIIs in $ billion 6.59 8.52 10.70 7.99 17.33 -10.50 -13.00

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Further, the depreciation of the rupee increased the level of inflation in the economy. Directly imported products, such as crude oil, fertilisers, pharmaceutical products, ores, metals and components for personal computers and laptops became more expensive following the rupee depreciation. Most computer components like processors, hard disks and motherboards are imported. Products such as keyboards, mouse and monitors also witnessed a discernible impact on their prices on the account of the rupee depreciation. As input costs increased inflation rose in the economy. The falling rupee also adversely affected the oil pool deficit. For the next few years, the government will have to find a balance between high prices and deficits. The Finance Ministry will also have to take into account the possible effects of resisting the depreciation. Raising interest rates to counteract the depreciation will add to interest costs. This may dampen healthy growth impulses and lower revenue collections. Finally, the falling rupee makes the US an expensive destination for education. India sent around 83,833 students to the US in 20067. Due to the depreciation and the current US economic crunch, education industry experts foresee students looking at new destinations like the United Kingdom (UK) and Australia for higher studies. The Higher Education Statistics Agency in the UK reported that over 23,800 Indian students visited the UK for higher education in 20067. Australia was the second most popular international education destination for Indian students after the US. According to data from IndoAustralian Education Counsellors India sent around 83,833 over 63,000 Indian students went to students to the US in 20067. Australia for higher studies in 2007. The Due to the depreciation and the Indian rupees fall against the dollar current US economic crunch, caused a huge increase in the expenses of education industry experts Indian students in various US foresee students looking at new universities. On the other hand, as the destinations like the United rupee remained more or less constant Kingdom and Australia for against the euro and Australian dollar, higher studies. many Indian students shifted focus to other countries. Students and parents fear that if the rupee continues to fall they will have to pay over 20 per cent more.
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CONCLUDING REMARKS

he fall in the value of a currency not only hurts national pride, but carries many risks as well. The depreciation of the rupee, dampened inflows of foreign capital, raised external debt burdens and increased Indias oil and fertiliser subsidy bills. A positive impact of the depreciation was the stimulation of merchandise exports and the discouragement of merchandise imports, which improved the terms of trade. However, despite significant increases in exports and sales in 2008, Indian companies have reported huge forex losses due to the depreciation. This decreased the overall profitability of companies. For a country like India, imports are necessary and include essential goods like crude For a country like India, imports oil, fertilisers, pharmaceuticals and many are necessary and include capital goods. Thus, the argument that essential goods like crude oil, depreciation is good as it discourages fertilisers, pharmaceuticals and imports is futile. Further, software and other exports many capital goods. Thus, the argument that depreciation is depend less on the rupees value and good as it discourages imports is more on the quality and reputation of products. Thus, in the phase of an futile. appreciating rupee, India achieved significant export growth of 27 per cent, while after the rupee depreciated, September 2008, registered an export growth of 10.4 per cent and an import growth of 43.3 per cent. According to official data released on November 3, 2008, Indias trade deficit shot up by 53 per cent in AprilSeptember 2008 to $ 60 billion as against $ 39 billion in the corresponding period the year before. The impact of falling exports on the rupee was offset somewhat by falling imports, though pressure on the weakened rupee will remain in the near term, not only due to portfolio outflows, but also because of corporates and banks swapping rupees for dollar. Imports increased by 43 per cent to $ 24.4 billion, widening the trade deficit to $ 11 billion. The global financial and economic headwinds have adversely affected foreign demand for Indian manufactured goods. Therefore, given the slowdown in FII inflows, the trade deficit and other reasons, the fall in the value of the rupee was inevitable. In such a scenario, while it is not possible to eliminate forex risks, companies that adopt prudent hedging strategies will have an edge over their peers. 164
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D E P R E C I AT I O N O F T H E I N D I A N C U R R E N C Y

As far as the future of the rupee is concerned, a reverse trend is expected. There are fewer reasons for a strong dollar and the liquidity injected by the $ 700 billion bailout package for the US financial system, to be inevitably followed by other such infusions, will itself put pressure on the dollar to depreciate. Substantial inflows of dollars into capital accounts are likely through foreign direct investments (FDIs) and debt and private equities. India received $ 14.6 billion in FDIs in AprilAugust 2008, which surged to $ 17.21 billion in the month of September 2008, up 9 per cent over the same month in 2007 and up 137 per cent over the previous year Indias trade deficit shot up by ($ 7.27 billion). Easing of international 53 per cent in AprilSeptember commodity prices will significantly ease 2008 to $ 60 billion as against the pressure on Indias current account $ 39 billion in the corresponding and rupee. The RBI has already taken a period the year before. number of measures in this direction. Interest rate ceilings have been hiked for some non-Resident Indian deposits. ECB norms have been liberalised as limits for the rupee expenditure for infrastructure companies have been raised from $ 100 million to $ 500 million per borrower per financial year. The RBI is also looking to ease further ECB and FDI norms to attract more overseas investments. This suggests the possibility of a strengthening rupee. Nevertheless, rupee volatility is here to stay in the medium to short term. Still, a good policy should be proactive rather than reactive and the time has come for the RBI to intervene directly, as with the depreciation of the rupee, the Indian economy has more to lose and little to gain.

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Acknowledgements: L N Dahiya and S D Vashistha for helpful comments and constructive criticism.

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