Policy Measures to arrest continuing Slide of Indian Currency Value (INR) & Impact on Indian Trade

Presented by MBF Group 2

Depreciation of Rupee

More and more rupee brought

in our country and dollars are

sold.

More and more rupees are sold

and dollars are brought

Rupee Appreciates

Rupee Depreciates

Movement in INR Compared to Dollar & Euro

62.00 64.00 66.00 68.00 70.00 72.00 74.00 76.00 78.00 80.00 82.00

72.23 70.68

69.54 70.98

73.68

77.98

80.95

INR to EURO

Months

Exch

ange r

ate

48.00

50.00

52.00

54.00

56.00

58.00

60.00

62.00

53.29 53.77 54.39 54.22

56.50

59.70 61.12 INR to USD

Months

Exc

hange r

ate

The Indian Rupee has depreciated significantly against the US Dollar marking a new risk for Indian economy.

The rupee touched an all-time low of Rs 61.17 /$ on 31 July 2013, breaching its previous historic low of Rs 59.98/1$ of 2008. At the end of day it was Rs 61.12/1$.

.

Slide of Rupee

Reasons and

Effects

Reasons for Slump in the value of Indian Currency

High Current Account Deficit

Lower Foreign Capital Inflows

Lower Economic Growth and Devaluation Pressure

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.

Import V/s Export

2009-10 2010-11 2011-12 2012-13 -

100,000

200,000

300,000

400,000

500,000

600,000

Export($M)Import($M)

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).

Economic growth and Devaluation Pressure

After annual economic growth of nearly 9.30% in 2010-11, the growth rate has declined to 6.20% in 2011-12 and further to

5.00% in 2012-13.

The expectations for 2013-14 are also not too encouraging.

Economic Growth and Inflation In this scenario, most foreigners as well as Indians tend to

take money abroad, or keep it away from India. Global investors are also nervous about investing abroad in

nations such as India due to the economic crisis in their respective countries.

That has added further selling pressure on the rupee. Importers demand for dollars to cater for their needs to buy

goods abroad. Exporters cannot bring in enough dollars; in fact, they keep

their foreign earnings abroad as they expect the rupee to fall further.

Meanwhile, foreign investors increase the demand for dollars as they convert their rupee assets into dollars to take their money out.

This demand-supply gap between the dollar and the rupee leads to further devaluation.

Policy

Measures

The Rupee’s weakness is more due to high imports than anything else. Decreasing Imports and improving Exports is the panacea for long term.

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 Growing Indian economy has led to widening of

current account deficit as imports of both oil and non-oil products have risen. Despite dramatic rise in software exports, current account deficits have remained elevated.

The first set of measure should include a careful evaluation of the import tariff structure and increase it wherever such levels are lower than WTO requirement.

Curb on Import of non essential & unproductive products such as GOLD by imposing higher taxes.

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.

In this regard National Manufacturing policy will play a major role in years to come.

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.

• One of the measures being looked at is allocating a separate quota for sovereign wealth funds (SWF) in PSU divestment issues. This reservation could be as high as 30 percent.

• 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 ECB’s.

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.

Apart from the above measures a lot depends on the Global economic outlook and the future of Euro zone which will also determine the future of INR.

.

Impact on

Indian Trade

Impact on Indian Trade Controlling Import by Import Substitution will help the

domestic organization in growth resulting into favorable impact on Indian Trade.

Relaxing Foreign Investments norms will help Indian companies to expand and start new businesses.

Clear cut structure of tax and other laws & transparent policies will also have positive impact on trade.

Thank You