Major Problem in Indian Economy

Depreciating Indian Rupee :

Evolution of the Rupee

How it all began

Early Uses Coinage Since the British Period

Since 1947
Decimalisation

Dates From 1835 From 1 april 1957 From 1 june 1964

Currency System 1 rupee = 16 annas = 64 paise 1 rupee = 100 naya paise 1 rupee = 100 paise

1966 Economic Crisis 1991 Economic Crisis

Revaluation
Depreciation

Rupee after independence

Post Independence, the economic crisis of 1966 and 1991 collectively attributed to the weakening of the rupee further in global markets. The trade deficits of 1950, resultant inflation and the stopping of foreign aid, the war of 1965 and drought devalued the rupee further. Subsequent liberalization helped stem the flow till 1991, when India started facing its next wave of Balance of Payment Issues from 1985 1990. With imports restricted and high deficit, the rupee was devalued yet again especially by 1999.

 Between 2000 2007, the rupee stabilized quite a bit and reached levels of 39 (in 2007) as versus the USD. With high remittances, sustained foreign investment inflows and the development of exports in the sectors of outsourcing and technology, the rupee led a strong battle against the USD. However, the subsequent global economic recession since 2008 has led to it steadily losing value ever since.

Lets take a look some of crisis in the last five years

A snapshot of the World Economy

The United States of America experienced a major shake-out, technically known as recession in the year 2008. The financial crisis was linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States. The rise in the quantity of bad debt lead to a liquidity crunch. Significant decline in economic activity, 81 public corporations file for bankruptcy in the United States

Survival of the fittest: India

It was indeed the survival of the fittest, the Indian economy emerged out as a real hero with only minor bruises. Despite an unprecedented global recession, India remained the second fastest growing economy in the world. No recession for India Indias GDP grew by more than 6% throughout this period Further, India also made a successful recovery from 2009-11.

The Plight of the Indian Economy: 2011-12

Phase: Slowdown Indicators: GDP-6.5% as against predicted 7.6%

10 9 8 7 6 5 4 3 2 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 20122013 2009-2010 7.9 2010-2011 8.4 2011-2012 6.5 6.3 9.4 8.6 7.3 8.5 7.6 8.2 9.2 8 6.7 6.1 5.3

5.5

Issue of major concern: Depreciating Rupee

Depreciation or Devaluation??
Fixed Exchange Rate

Method of Exchange Rate Fixation

Floating Exchange Rate

Revaluation of Currency Devaluation of Currency

Currency Appreciation

Currency Depreciation

What is Depreciation?
Currency depreciation refers to a fall in value of one currency with respect to another. More and more rupees are sold and dollars are broughtRupee Depreciation So, if 1-1-2012---1 Re. = 2 Sri Lankan rupees 1-6-2012---1 Re = 1.5 Sri Lankan rupees INR would have depreciated by 25 per cent. Again if, today 1$ = 45 Rs. tomorrow 1$ = 60 Rs. INR would have depreciated by 33 per cent.

The Weakening Rupee

2nd worst performer in currency market among developing countries. Lost 15% since May 2013 Indonesia(RUPAIYA)and South Africa(RAND) depreciated by 7% and 10 % resp. They compete with India in Agri-products, Engg. goods, electronics and chemicals. Similarly Bangladesh(TACCA) depreciated by 5%, which competes in garment industry.

Thailand(BAHT) that competes in gems and jewellery, there currency

have depreciated by 7% .

Exchange Rate (INR Per USD)

67 57.15 53.395

45.19
43.5 43.47

48.88 46.37 39.42

46.21 44.17

54.73 48.24

32.427

17.01 7.5 8.39 7.86 12.38

1 1947 1966 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2011 2011 2012 2013 2013 (jan) (jan) (jan) (oct) (oct) (22 (april) (sep (nov (june (may (aug jan) 21) 17) 22) 15) 30)

Causes of Depreciation in Rupees (INR)

ROLE OF RBI
Unchanged Interest Rates:
RBI kept its interest rates unchanged in its Monetary Review on June 17 and July 30.

Keeps repo rate unchanged at 7.25 percent.

Reverse repo rate stays at 6.25 percent. Cash reserve ratio unchanged at 4.00 percent.

Effect of Unchanged Rates

Before we continue
Repo Rate : The rate at which the RBI lends money to commercial banks is called repo rate.
Reverse Repo Rate : The rate at which the RBI borrows money from commercial banks.

Cash Reserve Ratio (CRR) : The amount of funds that the banks have to keep with the RBI.
FII : Foreign Institutional Investor, An investor or investment fund that is from or registered in a country outside of India.

Role of RBI
Authorized Body, Forex Licenses Investments by Foreigners & Foreign Travel EXIM Trade
RBI is the apex bank that intervenes, supervises, controls the foreign exchange markets in order to create an stable and active exchange market

High Current Account Deficit

Gold Imports, hefty oils bills and decreasing exports due to global slowdown leads to higher current account deficit. Our imports are higher than exports resulting into a worsening CAD. The fall of the oil price to US$90/barrel has helped India to fight the depreciating rupee up to some extent but at the same time the Euro zone, one of India's major trading partners is under a severe economic crisis leads to reduced exports. Thus India record a CAD of around 4.9%, depleting its Forex reserves and depreciating the rupee.

Balance of Trade Imports vs Exports

Oil Imports Issue

Gold Imports Issue

950 Tons of estimated imports this year. 10% of import bill, 75% of imports as jewellary. 33% of worlds Demand Villainous figure in CAB Need for innovative financial instruments that can provide real returns

Policy paralysis
Key policy reforms like
Direct Tax Code (DTC) 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 busine ss community.
The government announced FDI in retail but had to hold back amidst huge fur ore from both opposition and allies. This has further made investors sentiment negative over the Indian economy.

Role of Government of India

Monetary Exim Policy

Fiscal

Control measures for Currency

Low Growth and High Inflation

. Foreign Capital Inflows

Lower Capital Inflows

Although India has emerged as an attractive investment destination which can woo foreign capital from FII and deposit from Non residents in the long term, but it is still not enough to make up for deficit. Further the uncertainty and delay in our commitment to economic reforms, retrospective taxes, and policy paralysis within the government have created a fear in mind set of global investor resulting into decline of foreign Investment.

In 2012-13, India received FDI of $22.4bn against $ 35.1 bn in the PY. (38%less).

Recession in developed economies like US made big institutions to pull out their money from India

Lack of Capital Inflows

$3.3 billion of Government & Corporate Bonds Bought vs$6.86b last year

Quantitative Easing
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective.
US Federal Reserve announced Tapering QE on June 19,which started a Fire sale in the world currency market, currencies of major countries started depreciating including Indias Rupee. With the news of QE tapering Fiis started offfloading their investments across Asian markets.

Other Reasons
Increase in Crude prices.
Increase in Fiscal Deficit of India. Rupee Speculation

Devaluation Pressure

Impact of depreciation of Rupee on IB

Exporters are the biggest beneficiaries NRIs become richer Tourism industry will flourish as the holidays in India will get cheaper. Imports will become expensive Oil prices will increase Rise in inflation Poor returns on FIIs Difficulty in repayment of loans Foreign education will get expensive Foreign holidays will get expensive

Impact on Economy
Imports

Inflation
Interest Rates Fixed Income

Growth
Jobs

Affects of Weakening Rupee on Businesses Positives

Mixed

Negative

Companies having foreign debt will be impacted severely as compared to export oriented companies

Advantages of Rupee depreciation to Indian Economy

Beneficial to the Exporters Good News for NRIs

Benefits to the IT sector

Benefits to Investors invested in International Funds Benefits to the Hotel Industry

Disadvantages of Rupee depreciation to Indian Economy

Impact on inflation & fiscal deficit. A blow to Indian importers.

Exporters face difficulty in securing new orders.

Negative impact on FII flows to Indian market. Negative impact on Indian students and travellers abroad

Steps taken by RBI to curb Rupee Volatility

RBI increases restrictions on gold import by Canceling Margin Funding to import gold. The Govt. increased import duty on gold import to 8 % from 6 %. RBI creates Demand for rupee by sucking excess rupee liquidity.

The apex bank restricted the limit of individual bank borrowing to 0.50 percent of its total deposits (or net demand and time liability).
RBI increased the daily average requirement of CRR from 70 percent to 99 percent. The RBI will conduct sale of Government of India Securities to suck up Rs. 12,000 crore.

Measures to be adopted to curb the continuing slide of Indian Currency

Measures to Control Current Account Deficit

Measures to Increase Foreign Capital Inflows

Measures to Revive Economic Growth

Measures to Control CAD

To reduce import we should bring in import substitution by supporting the domestic organizations by providing subsidy, tax benefits, grants and proper Infrastructure. To contain the current account deficit we should also focus on boosting exports by export promotion policies and looking for more stable longer term foreign inflows have been suggested as ways to alleviate concerns on current account deficit.

Subsidy on import products such as oil should be discontinued.

Measures to Increase foreign Capital Flows

Recession in developed economies and uncertain political Environment made big institutions to pull out their money from India.

Measures to Increase foreign Capital Flows

Government can create a stable political and economic environment. Providing infrastructure and local support to the investors is another, admittedly more difficult avenue that can be explored in this regard. Making government bonds available to non-resident investors will also increase the inflow of dollars in to the country.

RBI can ease capital controls by increasing the FII limit on investment in government and corporate debt instruments and introduce higher ceilings in ECBs.

Measures to Revive Economic Growth

Apart from above measures to Control Current Account deficit and increase foreign Capital flows, on time policy executions and strict laws to curb corruption will also help us to revive the economic growth at fast pace.

Conclusion
Companies should be encouraged to raise fund overseas, foreign direct policy will be liberalized further, and there should be curb on import of non essential products.

Team Members
Yogesh Batra
Anjali Raghav Rahul Kuchhal

Preety Sharma
Vinnet Goel Akanshi jain Nikhil Bhupesh