DEVALUATION OF RUPEE DEVALUATION OF RUPEE

PRESENTED BY: FIZA BANSAL MAYANK BATRABHANU PRATAP RANA

INTRODUCTION

• Means decreasing the value of nation's currency relative to gold or the currencies

of other nations.

• Specifically implies official lowering of the value of a country's currency within a

fixed exchange rate system by which monetary authority sets a new fixed rate

with respect to a foreign currency.

• For example, Rs 25= 1 $.

Rs. 30 = 1$

• Usually undertaken as a means of correcting a deficit in the balance of payments.

MAIN OBJECTIVES OF DEVALUATION

1. To encourage exports

2. To Discourage the imports

3. To correct balance of payment

MAJOR REASONS BEHIND FALL IN THE VALUE OF INDIAN RUPEE

• Mounting demand of Dollar

• Mounting Current Account Deficit

• Inflation

• Corruption & Political Instability

• Mounting Trade Deficit

Inflation

• High inflation rate leads to decrease in purchasing power of money

• High inflation rate compared to other country will leads to increased import than the export.

• A fall in purchasing power due to inflation reduces consumption, hurting industries.

MOUNTING TRADE DEFICIT

YEAR EXPORT IMPORT TRADE BALANCE

CURRENT ACCOUNT DEFICIT

YEAR EXPORT IMPORT

2005-6 103090.5 149166.0

2006-7 126414.1 185735.2

2007-8 162904.3 251439.2

2008-9 185295.0 303696.3

2009-10 178751.4 288372.9

2010-11 251136.2 369769.1

2011-12 305963.9 489319.5

2012-13 300570.6 491487.2

(US $ million)

Source : Directorate General of Commercial Intelligence and Statistics

Corruption and Political Instability

• A series of corruptions cases

are being observed which

has reduced confidence

among investors.

• Lack of firm initiative by

government on issues like

allowing FDI in retail.

Mounting Demand of Dollar

• Due to instability in European markets

• Oil, gold and metals are all of a sudden

being dumped in favor of the dollar

• Shift of FII’ (foreign institutional

investors) from the Indian markets

• Increased export and less

import

• Impact on foreign investors

• Higher inflation

• Increase in cost of borrowing

IMPLICATIONS OF DEVALUATION

INCREASED EXPORT - IMPORT

• Fall in value of rupee makes exports

cheaper and imports expensive.

• Various sectors like petroleum and

petroleum products, engineering

goods drugs and pharmaceuticals –

which have import inputs of as

much as 75-77 percent, 19-21

percent and 17-19 percent , lead to

a strict dent on their income due to

fall in the value of rupee.

Impact on foreign investors

• When foreign investors

invest in Indian stock

market, they make a loss

if it depreciates and may

earn profit if rupee

appreciates

HIGHER INFLATION

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.

Increase in cost of borrowing

• Interest rate differentials in domestic and global markets encourage the industry to raise money through foreign markets however a fall in the rupee value would negate the benefits of doing so.

Devaluation : good or bad ?

• Creates an imbalance on Balance of Payments especially for import driven economies• Country like India pays much

more in INR . This further devaluates the currency. • This is a welcome change for

a company which is into the export of goods or services.

1. Allow free flow of foreign investment for development of infrastructure & manufacturing sector. 2. Restrain import of non essential and luxury items e.g. auto sector imports.3. Restrain export of agricultural produce and basic minerals e.g. iron ore.4. Promote aggressively exports of manufactured goods like China5. Promote migration of skilled personnel / work force from India..6. Facilitate the voluntary return of the funds parked outside India.

What Indian Government Can do, to Bring back Positive Vibrations in Indian Economy?

Conclusion

Even after taking few measures by government , rupee

depreciation has abated but it still remains under pressure.

Both domestic and global conditions are indicating that the

downward pressure on Rupee to remain in future.

Thus, RBI should continue its policy mix of controlled

intervention in forex markets and administrative measures to curb

volatility in Rupee.

Apart from RBI, government should take some measures to

bring FDI and create a healthy environment for economic growth.

We invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own” -Lionel Trilling