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INDIAN RUPEE CRISIS OF 2013

Introduction

The June 2013 announcement of Quantitative Easing (QE) tapering by the Federal Reserve Bank of

USA triggered huge capital outflows from emerging markets resulting in turmoil in financial marketsaround the world. Soon India joined the set of fragile economies such as South Africa, Russia, Brazil,Indonesia, Argentina and Turkey facing capital outflows and depreciating currencies.

On Aug.28, 2013 the Indian Rupee (INR) depreciated to its all-time low of Rs.68.845 per USD. INRhad depreciated by 20% from the beginning of the year and by 13.7% during June Aug.2013 1. Withthis kind of depreciation of INR, market analysts and international investors were left wondering ifIndia growth story was dead. The current crisis was reminiscent of the Balance of Payment crisisthat India had faced in early 1990s. Has India come full circle to the crisis of 1990s after successfuleconomic liberalization programme since the crisis? What went wrong? Where is the INR headed?Has the market over reacted? These are the questions for which market observers, investors and

policy makers were looking for answers.

Background

India was a relatively closed economy until 1990-91 when India faced severe Balance of Payment(BoP) crisis. Following this crisis India embarked on a reform programme which liberalized hereconomy both internally and externally. This resulted in increased growth during the post-reform

period from an average annual growth rate of 5.51% in 1980s to 5.87% during 1992-2003 (see Exhibit1). During 2003-8, India witnessed spectacular growth of around to 9%. India growth story becamea buzz word among investors and Indian policy makers alike. As subprime crisis hit the westernworld, India was not spared either with GDP growth faltering 6.7% during 2008-9 (see Exhibit 2).There was a quick recovery as GDP growth rose to 8.6% and 9.3% during 2009-10 and 2010-11respectively. However growth recovery proved short lived. Inflation surged along with growthrecovery prompting RBI to implement contractionary monetary policy. Towards the end of 2011things had turned gloomy once again for India. Situation turned for the worse in 2012- 2013. Theannouncement of QE tapering accentuated the problem threatening a full blown BoP crisis.

Post-Independence India

In the years following her independence in 1947, India followed a policy of inward-looking self-reliant approach to economic growth. Major policy mechanism aiding this approach was Five YearPlans which began with the establishment of Planning Commission in 1950. Indias approach toeconomic development was guided by Indias first Prime Minister Jawaharlal Nehru, who continuedtill 1964. Nehru was Fabian socialist who was impressed by the rise of Russia as an economic powerthrough central planning approach after the Bolshevik Revolution of 1917. Indias economic policieswere characterized by strong role for the public sector. Many of the industries were exclusivelyreserved for the public sector. While India made progress in science and technology, the economicgrowth rate continued to be low with average GDP growth rate of 3.5% from 1950-1980. Economic

policies prior to 1991 is summarized below.

Industrial Policy

Large industries were required to obtain license from the central govt. for expansion, setting up newunits or even for product diversification. Monopolies and Restrictive Trade Practices Act (MRTP)

1 Ali Syed Ashraf, Sliding Indian rupee: Causes and consequences, Financial Express, Sept 8, 2013.http://www.thefinancialexpress-bd.com/old/index.php?ref=MjBfMDlfMDhfMTNfMV85Ml8xODI1OTc%3D , accessed onMar 16, 2014.


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regulated industries with asset bases of more than INR10 million. The objective was to preventconcentration of economic power in the hands of few industrialists. Basic and heavy industries werereserved for investment by Public Sector Enterprises (PSEs). These included Steel, Oil, Minerals,Power, and Telecommunications etc. Foreign Direct Investment (FDI) was restricted to 40% ofequity. There were restrictions on Indian companies entering into collaboration with overseascompanies for technology transfer.

Trade Policy

Imports were generally under license except for the ones under Open General License. Peak rate ofcustoms duty was at 300% in 1991. Such restrictions were necessary as INR was kept overvalued tokeep the cost of imported capital goods cheaper. Objective of self-reliance meant that local industrieshad to be protected through tariffs and quotas.

Financial Sector

With two rounds of nationalization of banks in 1969 and 1980, the banking sector was controlled by public sector banks. Interest rates were regulated by the central bank. In addition to Cash ReservesRatio to be kept with RBI, commercial banks were required to have 38% of their assets in the form of

govt. securities under the Statutory Liquidity Ratio (SLR) requirement in 1991. SLR helped fundlarge budget deficits at low interest rates. Restrictions on asset portfolio meant that private sectorwould get loans at high interest rates and the spread between the deposit interest rate and loan interestrates were very high. Indian equity and debt market were not open to foreign investors.

Fiscal Policy

Fiscal policy prior to crisis was expansionary with average fiscal deficit during 1985/86 to 1989/90 at10.1% of GDP and primary deficit at 7.5%. Corresponding ratios for 1980/81 to 1984/85 were at 8%and 6.8% respectively 2. Excessive public spending caused high inflation by the end of 1980s .

1990-91 Economic Crisis

Annual inflation as measured by CPI during 1990-91 was 13.6% compared to 6.6% in 1989-90 3. Risein oil prices due to Gulf war, falling exports and loss of remittances arising out of Gulf crisis resultedin worsening of BoP situation. India was facing twin deficits of fiscal deficit and BoP current accountdeficit. Foreign exchange reserves stood at approximately USD 4 billion at end of March 1990 4. Indiahad to take loan from IMF from including loan of USD 1786 million in Jan 1991 form Compensatoryand Contingent Financing Facility (CCFF).

Indias Economic Reform

Economic reform programme began with devaluation of Rupee to in July 1991 to correct BoP currentaccount deficit. India pledged to cut the fiscal deficit from 8.4% (1990-91) to 6.5% in 1991-92. Thiswas coupled with restrictive monetary policy. These were expenditure reducing and expenditureswitching policies aimed at cutting the BoP current account deficit.

Simultaneously structural reforms were implemented with a view to liberalize the economy andintegrate the economy with rest of the world. Structural reforms involved de-licensing of industries,removal of reservation of industries for public sector, and disinvestment of Public Sector Enterprises,

2 Vijay Joshi and I.M.D.Little, India, Macroeconomics and Political Economy 1964-1991, The World Bank, WashingtonD.C., 1994, pg.181.3 Ministry of Finance, Govt. of India, Economic Survey 2012-13.4 Ibid


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reduction in barriers to foreign investment, reduction in trade barriers, financial sector deregulationincluding licenses for private sector banks, interest rate deregulation, and reduction in reserve ratios.Structural reforms continued as India adopted a gradualist approach to reforms rather than big bangapproach. For instance, even by 2013 India allowed only 51% foreign ownership in multi-brandretailing that too subject to approval of state governments for such FDI.

Indias Exchange Rate Reforms

From the 1970s to March 1, 1992, India was under a fixed exchange rate regime. The exchange ratewas decided by the central bank, RBI. The rate was adjusted in relation to a basket of currencies.Following the BoP crisis, in July 1991 INR was devalued by about 22% vis--vis USD. This wasfollowed in March 1992 with partial floatation of INR and a dual exchange rate system came intoexistence. On March 1, 1993, the dual exchange rate was abolished in favour of one unified marketdetermined exchange rate. Since then all foreign exchange transactions take place at exchange ratesdetermined by the forces of demand and supply. However, RBI intervenes periodically to regulate themarket. Thus, the current system is a managed float. Behaviour of Rupee since the exchange ratereforms is in Exhibit 6.

Liberalization of Capital Flows

India debated to move to capital account convertibility in mid 1990s after making it fully convertibleon current account in 1994. However, series of crisis in emerging markets in 1990s made India putthis idea on back burner. India liberalized capital flows gradually over time and made INR partiallyconvertible on capital account. FDI is permitted under automatic route subject to the caps in differentsectors, in some cases 100% FDI is permitted, in other cases this may range from prohibition of FDIinvestment to 24%, 49% or 74% cap on FDI investment (see Exhibit 12). India opened up for

portfolio investment but only qualified foreign institutional investors (FIIs) are allowed to invest inIndian equity market subject to caps on the extent of equity holding of such investors (see Exhibit 13).Similarly there are restrictions on participation of FIIs in the govt. bond market and corporate bondmarket, overseas borrowings by Indian corporates and banks. These measures have been introducedgradually and the limit expanded over time. Thus India has followed gradualist approach to capitalaccount liberalization. The IMF also backed Indias capital control measure saying that strong capital

flows pose a key challenge to Indias growth prospects.

"Directors observed that low yields in advanced economies and India's favourable growthdifferentials could raise capital inflows above its absorptive capacity While exchange rateflexibility would remain the first line of defense, reserve accumulation and macro-prudentialmeasures could be employed if strong inflows continue." 5

Despite gradual and controlled deregulation of capital flows, India became more vulnerable to capitalflow reversals as outstanding portfolio investment and short term debt have risen over time.

Why Has The Rupee Weakened?

External Factors

Some observers were of the opinion that the situation in 2013 was not just India-centric problem butmore of an emerging market phenomenon.

Clearly, emerging markets across have been reeling under the kind of currency pressure withthe dollar strengthening. So that is going to definitely continue," said Arindam Ghosh, CEO,BlackRidge Capital Advisors. 6

5 The Indian Express, Jan 07, 2011.http://archive.indianexpress.com/news/imf-backs-capital-controls-in-brazil-india/734569/ , accessed on Mar 16, 2014.6 The Economic Times, Aug.28, 2013.


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Bloomberg estimated that about USD3.9 trillion has been invested in emerging markets between 2009and 2013. Bloomberg said that as the Fed announced tapering of QE, cash invested in emergingmarkets started reversing. 7 10-year Govt. bond yields (see Exhibit 4) in USA and India during 2013gives important economic indication. The difference in yields narrowed in 2013 as US economyshowed signs of recovery and Fed announced QE tapering. Currencies of some of emerging marketscame under pressure as capital flew out (see Exhibits 8 and 9). There was net outflow (see Exhibit 10)of debt and equity from Indian markets during June Aug. 2013 triggering declines of INR.

Weak Balance of Payments, Rising Inflation and Economic Slow Down

Indias BoP statistics (see Exhibit 5) during 2007-8 to 2012-13, showed steady deterioration ofCurrent a/c balance over the years and in particular in 2011-12 and 2012-13. In 2011-12, there was anoverall BoP deficit resulting loss of foreign exchange reserves. Addition to foreign exchange reservesis also very marginal after the subprime crisis, even as current a/c deficit (CAD) increased rapidly.Moreover, the CAD has been financed mainly by non-FDI capital inflows which may exhibit sharptrend reversals. This raised questions about the sustainability of CAD and ability of RBI to defend theexchange rate amidst capital flow reversals.

The deteriorating BoP led some observers to believe that India has to blame herself for the current predicament in foreign exchange market.

"The problems are fundamental and our policy makers do not seem to realize the basic problem which is the huge deficit on current account and over dependence on capital inflows. Nobody can live forever on somebody else's money," said forex market expert, AV Rajwade 8 .

Inflation (Consumer Price Index based) which has been high since 2008-9 (see Exhibit 2), steadily ateinto competitiveness of Indias exports as nominal exchange rate remained stable during 2008-12 (seeexhibit 6). Economic growth also exhibited considerable slow down since 2011-12 (see Exhibit 2).

One of the contributory factors to inflation was the large fiscal deficit (see Exhibit 1) which was theresult of fiscal stimulus implemented by the Indian govt. after the economic slowdown that hit the

country following the subprime crisis.

Policy Paralysis?

The United Progressive Alliance (UPA) had successfully got second term in 2008 elections afterrunning full term in its first stint from 2003-8. The multi-party coalition was becoming a bottleneck inimplementing much needed economic reforms. Several reform bills were pending with thegovernment and could not be implemented due to pressure from alliance partners. On the other handfiscal deficit had gone very high following the fiscal stimulus package implemented as a response tothe 2008 crisis. Administered prices and subsidies in the food, fertilizer and petroleum sectors hadresulted in widening fiscal deficit and bringing down these was a difficult political exercise given thecoalition politics and elections in the state governments such as Uttar Pradesh and West Bengal.Besides, the govt. was under relentless attack from the opposition parties on corruption related issues,the major one being the telecom 2G spectrum scam. The slow reforms were termed by newspapers aspolicy paralysis. Leading newspaper, Times of India carried story under the head line End PolicyParalysis: India Inc in which it said that Indian corporate sector had urged the government to speed

http://articles.economictimes.indiatimes.com/2013-08-28/news/41538716_1_asian-equity-markets-indian-rupee-fresh-all-time-low , accessed on Feb 8, 2014.7 Bloomberg Aug 20, 2013http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html , accessed on Feb 25, 2014.8 NDTV, Jul 9, 2013.http://profit.ndtv.com/news/forex/article-why-the-rupee-may-fall-to-70-against-dollar-324232 , accessed on Feb 25, 2014.


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up stalled economic reforms, warning that policy paralysis threatened to derail the India growthstory 9

The ruling party sought to dispel the fears of policy paralysis. Instead the govt. blamed the externalsituation arising out of the European debt crisis for Indias slower growth.

We should not forget that we have achieved almost 9% growth every year with the same policy paralysis. Let India Inc give an analysis for it first, then we will think about what policy they are saying," Congress party spokesperson Renuka Chaudhary said. 10 She addedthat India had managed well amidst crisis.

Reacting to the criticism of policy paralysis, the then Finance Minister, Pranab Mukherjee contendedthat govt. had undertaken several policy reforms. But he conceded that it a multiparty coalition haddelayed reforms:

"There is no question of policy paralysis in New Delhi. I do not agree with them.People will have to be on board and in order to have them on board we shall have to persuadethem, we shall have to carry dialogue and discussions with them. This is the only way throughwhich we build up consensus." 11

Indian industry did not appear to be convinced with governments defense and argued forimplementation of structural reforms. As sample of such reactions is given below:

Indias slump is worse than elsewhere in Asia because the country has failed to carry outlong-overdue structural changes to the economy, said Indranil Pan, chief economist at KotakMahindra Bank. 12

"Unless reforms related to growth and lowering the current account deficit are addressed,things will not improve," said Devendra Pant, Economist, India Ratings 13. "The governmentand RBI need to focus on reforms rather than short-term quick fixes (for the rupee)," saidShubhada Rao, chief economist at Yes Bank. 14

Crisis of 1990s Revisited?

For some market players the ongoing weakness of Rupee was reminiscent of the crisis of 1990s andthey consider that risks have heightened now due to the progressive opening up of capital account.

The currency has weakened about 28 percent versus the dollar in the past two years, revivingmemories of the early 1990s crisis, when the government received an International MonetaryFund loan as foreign reserves waned. - A story in Bloomberg 15

9 Times of India, Nov.14, 2011.http://timesofindia.indiatimes.com/business/india-business/End-policy-paralysis-India-Inc/articleshow/10719879.cms,

accessed on Mar 16, 2014.10

Times of India, Nov.15, 2011.http://timesofindia.indiatimes.com/india/Congress-dismisses-notions-of-policy-paralysis/articleshow/10733395.cms ,accessed on Mar 16, 2014.11 The Hindu, April 22, 2012.http://www.thehindu.com/business/Economy/no-policy-paralysis-in-new-delhi-pranab/article3342569.ece, accessed on

Mar 16, 2014.12 Bloomberg Aug.20, 2013.http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html,accessed on Feb 25, 2014.13 Yahoo Singapore Finance, Aug.22, 2013.

http://sg.finance.yahoo.com/news/indias-rupee-skids-record-low-051443809.html, accessed on Feb 25, 2014.14 Ibid.15 Bloomberg Aug.20,2013.


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Some felt that the situation was much worse now as Indian economy is more integrated with rest ofthe world now than in the 1990s and hence more susceptible to global headwinds.

"In 1991, the global situation was relatively more reassuring. But, now, India's openness hasincreased substantially. So, in that sense, any shock in the global economy will have a largeimpact on the domestic sector. Hence, we are kind of worried about the balance of paymentsdespite numbers being relatively better than 1991" - Samiran Chakraborty, head of IndiaResearch, Standard Chartered Bank. 16

Future Outlook for INR

As INR breached Rs.64 level on Aug. 20, 2013, market expectation regarding INR-USD rate was veryvaried (see Exhibit 11).

However, some players felt that Rupee had overshot its fundamentals."We continue to believe that fundamentally the rupee is undervalued and has overshot itsequilibrium level substantially, but as numerous episodes of past currency crises have amplydemonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and

remain so for a long time, said a Deutsche Bank report17

But gloom set in on Aug.28, 2013 as INR touched crossed 68 mark against the Greenback the marketwent into panic mode.

"It is just impossible to put any realistic value to the rupee anymore," said Uday Bhatt, aforex dealer with UCO Bank 18 .

Others felt that depreciation of Rupee was just what the doctor had ordered."It is better for us to have a weaker currency than otherwise Why do we need a currency

below 60 to the dollar. We don't. But at the same time it's important that we do not let panic prevail when the currency hits 68 or 70," says Manoj Rane, MD & Head Fixed Income &Treasury-India, BNP Paribas. 19

As confusion prevailed in the market over the future course of rupee, market players and analystswondered as to what went wrong with Indian economy? What are the causes of such a steepdepreciation of INR? Is it just the reflection of what was happening in other emerging markets?Where is the INR headed from here? Has the INR overshot its fundamental value? The answers tothese questions were important for policy makers as well.

http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html,accessed on Feb 25, 2014.16 Ibid17 NDTV Aug.21, 2013.

http://profit.ndtv.com/news/forex/article-indian-rupee-may-crash-to-70-per-dollar-in-a-month-deutsche-326087,accessed on Feb 25, 2014.18 The Indian Express, Aug.28, 2013.http://indianexpress.com/article/business/business-others/indian-rupee-hurtles-lower-as-foreign-investors-flee/,accessed on Feb 08, 2014.19 The Economic Times, Nov. 04, 2013.http://articles.economictimes.indiatimes.com/2013-11-04/news/43658895_1_treasury-risk-management-consultant-av-

rajwade-manoj-rane, accessed on Feb 25, 2014.


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Exhibit 1: Indias GDP Growth Rate

Period CAGR

1950-51 to 1980-81 3.56

1981-82 to 1991-92 5.51

1992-93 to 2002-03 5.872003-04 to 2008-09 8.97

2003-04 to 2010-11 8.45

Note: 1. Created by authors.2. CAGR has been computed based on the GDP at factor cost (2003-4 prices).

Source: Database of Indian Economy-Reserve Bank of India, http://dbie.rbi.org.in/

Exhibit 2: Annual Percentage Change in Key Economic Indicators

Indicator 2007-8 2008-9 2009-10 2010-11 2011-12 2012-13

Real GDP growth 9.3 6.7 8.6 9.3 6.2 5.0

Inflation (CPI based) 6.2 9.1 12.4 10.4 8.4 10.21

Growth of M3 (Broad Money) 21.4 19.3 16.8 16 15.6 13.6

Growth of Imports (in USD) 35.5 20.7 -5 28.2 32.3 0.32

Growth of Exports (in USD) 29 13.6 -3.5 40.5 21.3 -1.8

Note: All figures for Financial Year April 1 to March 31.Source: 1. Economic Survey 2011-12, http://indiabudget.nic.in/

2. Database of Indian Economy-Reserve Bank of India, http://dbie.rbi.org.in/


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Exhibit 3: Major Economic Indicators of Indian Economy 2007-8 to 2012-13

Indicator 2008-9 2009-10 2010-11 2011-12 2012-13

1. GDP at Market prices (Rs. billion) 56300.63 64778.27 77953.13 89749.47 100,281.18

2. Broad Money (M3) (Rs. Billion)# 47947.75 56026.98 65041.16 73648.37 83820.24

3. GDS/GDP ratio 32 33.7 33.7 31.3 30.1

4. GDI/GDP ratio 34.3 36.3 36.5 36.4 34.7

5. Fiscal deficit/ GDP ratio 6.0 6.5 4.8 5.7 4.96. Total Foreign Exchange Reserves

(million USD)# 251985 279057 304818 294398 292046

7. Total Foreign Exchange Reserves (Rs.Billion)# 12838.65 12596.65 13610.13 15061.30 15884.20

8. Long Term External Debt (millionUSD)# 181,185 208,606 2,40,871 2,67,319 2,93,350

9. Short term External Debt (millionUSD)# 43,313 52,329 64,990 78,179 96,697

10. Total External Debt (million USD)# 224,498 260,935 305,861 345,498 3,90,048 * 11. Outstanding portfolio investment in

India (million USD)83210.56 138577.31 167338.82 181472.76 192223.05

Note: 1. # End March of the financial year.2. *Out of this USD 172,346 m had a residual maturity of 1 year or less

Source: 1. Reserve Bank of India,http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPREXD21860613.pdf (for indicators 1, 2, 6-10)

2. Planning commission of India,http://planningcommission.nic.in/data/datatable/1203/table_1.pdf (for indicators 3-5)


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Exhibit 4: Ten-year US and Indian Govt. Bond Yields and Yield Differential

Note: Graph and calculations by authors.Source: Thomson Reuters Eikon database.

0

1

2

3

4

5

6

7

8

9

10

USA

India

differential


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Exhibit 5: Indias BoP Statistics (Net USD million)

Item 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08

A. CURRENT ACCOUNT

I. MERCHANDISE -195,656 -189759 -130593 -118374 -118,650 -91,467

II. INVISIBLES (a+b+c) 107,493 111604 84647 79991 89,923 75,731

a) Services 64,915 64098 48816 35726 49,631 38,853

b) Transfers 64,034 63494 53140 52305 44,798 41,945

c) Income -21,455 -15988 -17309 -8040 -4,507 -5,068

Total Current Account (I+II) -88,163 -78155 -45945 -38383 -28,728 -15,737

B. CAPITAL ACCOUNT

1. Foreign Investment (a+b) 46,711 39231 39652 51167 3,467 43,326

a) Foreign Direct Investment 19,819 22061 9360 18771 17,498 15,893

b) Portfolio Investment 26,891 17170 30293 32396 -14,030 27,433

2.Loans (a+b+c) 31,124 19307 28437 13259 8,669 40,653

a) External Assistance 982 2296 4941 2893 2,637 2,114 b) Commercial Borrowings

(medium and long term) 8,485 10344 12506 2808 7,941 22,609

c) Short Term To India 21,657 6668 10990 7558 -1,909 15,930

3. Banking Capital (a+b) 16,570 16226 4962 2084 -3,245 11,759

4. Rupee Debt Service -58 -79 -68 -97 -100 -122

5. Other Capital -5,047 -6929 -10994 -13016 -1,545 10,969

Total Capital Account (1 to 5) 89,300 67755 61989 53397 7,246 106,585

C. Errors & Omissions 2,689 -2432 -2993 -1573 1,401 1,316

D. Overall Balance (A+B+C) 3,826 -12831 13050 13441 -20,080 92,164

E. Foreign Exchange Reserves -3,826 12831 -13050 -13441 20,080 -92,164

Source: RBI various press releases on Balance of Payments


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Exhibit 6: Historical Trends in Indias Exchange Rate, Consumer Price Index and US Consumer PriceIndex: 1990-2010

Year Exchange rateINR/USDIndia CPI (IW)

(2001=100)US CPI

(2001=100)

1990 17.5 41.67 74.35

1991 22.69 47.28 77.411992 25.92 51.81 79.65

1993 31.44 55.7 81.9

1994 31.37 61.31 83.92

1995 32.42 67.57 86.34

1996 35.43 73.83 88.82

1997 36.32 79.02 90.84

1998 41.27 89.38 92.05

1999 43.06 92.4 94.06

2000 44.94 95.85 97.35

2001 47.19 99.96 100

2002 48.6 104.06 101.38

2003 46.58 107.94 103.63

2004 45.32 112.26 106.34

2005 44.1 117.01 110.09

2006 45.33 125 113.6

2007 41.29 133 116.87

2008 43.42 145 121.64

2009 48.36 163 120.82

2010 45.74 180 123.322011 46.5 195 127.71

2012 47.92 215 130.39

2013 54.4 235 132.18

Source: 1. Database of Indian Economy-Reserve Bank of India,http://dbie.rbi.org.in/ for Exchange rate and India CPI data.

2. For US CPI data (converted to 2001 base)http://www.seattle.gov/financedepartment/cpi/historical.htm


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Exhibit 7: Ten-year US and Indian Govt. Bond Yields

Note: Created by authors based on Thomson Reuters Eikon database

Exhibit 8: Trends in Exchange Rates of Currencies of Few Emerging Markets (2013)

Note: Graph based on exchange rates from Exhibit 9 with Jan. 2013 as base =100.

95

100

105

110

115

120

Jan Feb Mar Apr May Jun Jul Aug

Brazil

India

Russia

South Africa

Turkey

Indonesia

Average USA India

2006 4.78 7.66

2007 4.57 7.95

2008 3.59 7.86

2009 3.27 7.02

2010 3.13 7.83

2011 2.73 8.38

2012 1.74 8.31

2013 2.36 8.11


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Exhibit 9: Exchange Trends (Local Currency per One USD)

Country Brazil India Russia South Africa Turkey Indonesia

Currency Real Rupee Ruble Rand Lira Rupiah

Jan 2013 2.032844 54.24474 30.22728 8.792488 1.770204 9656.784

Feb 1.973499 53.84735 30.19734 8.874704 1.775661 9682.544Mar 1.98476 54.40531 30.82117 9.186378 1.807595 9706.435Apr 1.998499 54.36633 31.3406 9.098645 1.795447 9722.832May 2.035004 54.95519 31.32969 9.333389 1.825108 9752.297Jun 2.17458 58.27126 32.33161 10.00473 1.897836 9875.253Jul 2.253167 59.75162 32.77969 9.9321 1.934933 10087.48Aug 2.338976 62.69576 32.99785 10.05959 1.959233 10601.13

Source: Web address - http://www.x-rates.com , accessed on Feb.20, 2014.

Exhibit 10: Net Capital Flows into India (USD million)

Month Equity Debt Total

Jan-13 4,067 543 4,610

Feb-13 4,539 743 5,282

Mar-13 1,677 1,065 2,742

Apr-13 996 981 1,977

May-13 4,034 1,086 5,120

Jun-13 -1,892 -5,686 -7,579

Jul-13 -1,019 -2,015 -3,033

Aug-13 -945 -1,559 -2,503

Sep-13 2,047 -890 1,157Oct-13 2,553 -2,207 346

Nov-13 1,297 -956 341

Dec-13 2,601 855 3,457

Total - 2013 19,955 -8,039 11,916

Note: Created by authors based on the data from Securities and Exchange Rate Board (SEBI) of India by usingaverage exchange rate (Exhibit 9) for respective months.Source: Web address- http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii , accessed on Mar.16, 2014.


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Exhibit 11: INR-USD Exchange Rate Predictions

Predicted by Prediction for exchangerate (INR/USD)

Remarks

Kanika Pasricha, ICICI Bank Ltd. 59-60 In the near termCRISIL 60 By end March 2014

Barclays 61 By Feb-March 2014A.V Rajwade 70 Greater chances of the rupee

hitting 70 rather than 60Jamal Mecklai, MD and CEO at MecklaiFinancial and Commercial Services Ltd. 24

57-67 By Aug.2014

Harding, Independent expert 62-65 -Deutsche Bank's analysts 70 By October 2013

Note: Experts opinion collected from various sources (see respective footnotes)

Exhibit 12: FDI investment limits

FDI limit Sector/Activity100% Agriculture & Animal Husbandry; Tea Plantation; Mining; Petroleum & Natural Gas; Civil

Aviation Airports; Courier services; Construction Development: Townships, Housing, Buil t-upinfrastructure; Industrial Parks new and existing; Trading- Cash & Carry Wholesale Trading/Wholesale Trading (including sourcing from MSEs) and E-commerce activities; Single Brand

product retail trading; Non-Banking Finance Companies (NBFC); Pharmaceuticals74% Broadcasting Carriage Services; Other services under Civil Aviation sector; Satellites

Establishment and operation; Telecom services; Financial Services -Asset ReconstructionCompanies; Banking Private sector

51% Multi Brand Retail Trading49% Air Transport Services; Private Security Agencies; Commodity Exchange; Credit Information

Companies (CIC); Stock exchanges, depositories and clearing corporations, in compliancewith SEBI Regulations; Power Exchanges

26% Defence; Broadcasting Content Services; Print Media; Insurance20% Banking- Public Sector subject to Banking Companies (Acquisition & Transfer of

Undertakings) Acts 1970/80

0%(prohibited)

Lottery Business including Government /private lottery, online lotteries, etc.; Gambling andBetting including casinos etc.; Chit funds; Nidhi company; Trading in TransferableDevelopment Rights (TDRs); Real Estate Business or Construction of Farm Houses;Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobaccosubstitutes; Activities / sectors not open to private sector investment e.g. Atomic Energy andRailway Transport (other than Mass Rapid Transport Systems)

Source- Department of Industrial Policy and Promotion 26

20 WSJ, Aug.23, 2013.http://blogs.wsj.com/indiarealtime/2013/08/23/analysts-rupee-heading-to-70/, accessed on Feb 25, 2014.21 The Economic Times, Aug.23, 2013.

http://articles.economictimes.indiatimes.com/2013-08-23/news/41440695_1_current-account-deficit-foreign-capital-inflows-rupee, accessed on Feb 25, 2014.22 Ibid.23 The Economic times, Nov.4, 2013.http://articles.economictimes.indiatimes.com/2013-11-04/news/43658895_1_treasury-risk-management-consultant-av-

rajwade-manoj-rane, accessed on Feb 25, 2014.24 The Live Mint and Wall Street Journal, Nov.12, 2013.http://www.livemint.com/Money/P4xmwBkcAv73fq2qcam0BJ/Rupee-opens-lower-against-dollar-ahead-of-IIP-inflation-dat.html, accessed on Feb 25, 2014.25 Financial Express, Sept.8, 2013.http://www.thefinancialexpress-bd.com/old/index.php?ref=MjBfMDlfMDhfMTNfMV85Ml8xODI1OTc%3D, accessed onFeb 25, 2014.

Department of Industrial Policy and Promotion, Consolidated FDI Policy, Apr 5, 2013.http://www.dipp.gov.in/English/Policies/FDI_Circular_01_2013.pdf, accessed on Apr 23, 2014.


15/15

Exhibit 13: FII investment limits

Maximum allowed investment as per cent of the paid up capital of

the Indian company Registered foreign investor entity10% SEBI registered FIIs and its sub accounts

5%Foreign corporates or High Net-worth Individuals (HNIs)registered as sub accounts of an FII

24% All FIIs and their sub-accounts taken together5% An Non-Resident Indian (NRI) or a Person of Indian Origin (PIO)

10% All NRIs/PIOs taken togetherSource- Reserve Bank of India- Foreign investments in India 27

http://www.rbi.org.in/scripts/FAQView.aspx?Id=26#3; accessed on April 11, 2014, accessed on Feb 25, 2014.