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| Date post: | 13-Apr-2017 |
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CONTENTS
• Introduction
• Valuation history
• Exchange rate mechanism
• Causes of devaluation of Indian rupee
• Implications of devaluation of Indian rupee
• Policy options with RBI to control devaluation of rupee
• Role of GOI to control rupee devaluation
• Conclusion
Udaya Kumar Dharmalingam, the man who designed the rupee symbol
Launched on 8 July 2011
Exchange Rate Mechanism
All economies that interact with international economy can be broadly classified into three categories on the basis of exchange rate policy of the country.
1. Fixed Exchange Rate
2. Floating (or free) Exchange Rate
3. Hybrid system
How does government control exchange rate?
• control is exercised by actively participating in international currency market through its central bank (Reserve Bank of India or RBI in our case)
Continue…………• Suppose there is huge demand of rupee in India which is driving the value
of rupee.• Also, let’s assume that RBI is comfortable only in range of Rs 50 to Rs.
60 per US dollar.• This rapid surge in th e demand of rupee which might be because of a. Indian export is far more than its import, b. foreign investors want to invest in India c. large number of Indians earning abroad are remitting their money back
home All these together pushing the exchange rate below Rs. 50 per dollar.
Contd……….
• The RBI will then step in the market and will offer Rs.50 for each dollar.• Soon other traders will have to arrive at this rate, if they want to participate
• Since RBI has the ability to print currency notes, it can keep the lower
limit of exchange rate fixed at this value
• When demand for rupee is subsided, RBI will step back and let market
determine the exchange rate.
• In the process, RBI will have accumulated a pool of dollars; this is called
forex reserve or foreign exchange reserve
Contd……..• Let’s assume that exports have dwindled, imports are on surge, foreign
investors are fleeing Indian market and remittances are at all time low.• Now, everyone wants dollar but there is little supply.• This will drive the price of dollar up. It’s about to breach the upper limit of
Rs. 60/ USD• RBI will step in again and will put its dollar reserves on sale at the rate of Rs.
60/ USD. This will stop the further depreciation of rupee• Finally, as you can see, in order to be able to stop the currency from
appreciating, RBI will have to print money and for preventing its depreciation it needs a reserve of dollar
ROAD MAP
1. INTRODUCTION
2.CURRENT SCENARIO
3. CAUSES
4. IMPACT
5. REMEDIES
6. CONCLUSION
CURRENT SCENARIODepreciation in rupee has become a big
tension for the Indian Government and breaking news for the news channels these days.
Rupee has declined to its peak level in the month of July, 2013and is expected to continue in coming days.
The current exchange rate as on 5\9\13 is 68.600with a current GDP of approximately 5%.
MAJOR REASONS BEHIND FALL IN THE VALUE OF INDIAN RUPEE
• Demand Supply Rule
• Dollar gaining strength against the other currencies
• Mounting Current Account Deficit
• Increased import
• Inflation
• Mounting Demand of Dollar
• High Government Deficit
• Mounting Trade Deficit:
• Outflows of Foreign Capital:
• Lower Inflows of Foreign Capital
• Oil Prices
• Rupee Speculation
Deprecation Of Rupee
RUPEE APPRECIATES
RUPEEDEPRECIATES
More and more
rupees are brought in
our country and
dollars are sold
More and more
rupees are sold and
dollars are brought
Widening Current Account Deficit
This is resulting in creating more actual as well as speculative demand for the dollar and other convertible currencies.
The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. In the current account, goods, services, income and current transfers are recorded. In the capital account, physical assets such as a building or a factory are recorded.
The Current Account Goods (general merchandise, goods used for processing other goods) Services (transportation, business services, tourism, royalties or licensing) Income (money going in or out of a country from salaries, portfolio investments, direct investments or any other type of investment.) Current Transfers (workers' remittances, donations, aids and grants, official assistance and pensions.)
The balance of the current account tells us if a country has a deficit or a surplus.
A surplus is indicative of an economy that is a net creditor to the rest of the world.
A deficit reflects government and an economy that is a net debtor to the rest of the world.
Theoretically, the balance should be zero, but in the real world this is improbable.
WITHDRAWAL OF INVESTMENTSRecession in developed economies like US made big institutions to pull out their money from India
GOLD PRICE RISEThe fear of bubble bursting in gold has resulted in investors viewing dollar as a safe currency
TRADE DEFICIT• Trade deficit has widened by 40,000 crores in
the last quarter. This has resulted in increased imports and spike in dollar demand
Policy InactionPerception of lack of clarity on policy front is also fanning speculative demand wherein the Reserve Bank of India (RBI) on one day said it will tighten liquidity and on yet another said it will inject $1 billion in the market.
Low Forex Reserves
India's foreign exchange (Forex) reserves are enough to cover imports of seven month only. The forex reserves have declined in the recent months. Due to low reserves, the RBI can't intervene aggressively in the currency markets.
Economic Growth SlowdownIndia's gross domestic product (GDP) growth fell to a decade low of 5 percent in 2012-13. The situation is unlikely to improve much this year. Foreign investors are pulling money out of the Indian markets due to slow growth.
Dependence on Foreign moneyIndia's current account deficit was financed by foreign money for the last many years. Withdrawal of money by overseas investors is leading to the weakness in the rupee.
Recovery in the USThe slow but steady recovery in the US is making the greenback stronger against other currencies.
Stimulus Withdrawal
Indications that the US may withdraw or ease the fiscal stimulus package that has been on since a few years ago to tide over the economic crisis there, could potentially put the brakes on funds for developing economies.
Capital ControlsThe decision by the Reserve Bank and the government to impose temporary restrictions on capital flows has not gone down well with the markets, as it will not only discourage Indian companies from investing abroad, but also foreign firms from pumping money into India.
Trends in other markets
The rupee is also following the trend seen in the currencies of other emerging economies such as Brazil, Indonesia, Russia and South Africa.
Speculative Trading
Speculative trading in the currency markets is putting further pressure on the Indian rupee
POSITIVE IMPACTReducing the usage of natural resources.Reducing the usage of imported materials.Exporters (like those from the IT and
Pharmaceutical ) will get benefit from depreciation of Indian rupee.
Increase the demand of Indian products.Good for companies that export things.
Operating cost will be increased there by reducing the profit margin.Increase the price of petroleum products that leads to inflation.Bad for companies that import a lot.Increase the amount of foreign loan.
NEGATIVE IMPACT
SHORT TERM REMEDIESBoost the slowing industrial
growth.Raising the foreign investment
capital.More exports incentives and
reduce imports.
LONG TERM REMEDIESAttracting the foreign investors by
bringing changes in the policy reforms.Import of gold up to a certain extent
should be provided and the import duty should be raised.
CONCLUSIONThe RBI and other Government agencies
are doing their best to tackle this situation.
India has lost a lot due to increasing corruption and lethargic government policies.
Investors have lost faith on Indian economy , American investors are gaining confidence on American economy and thus decrease in falI of Indian rupee have added to block.
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