In this paper we are traveling to analyze the cause and the impact of rupee depreciation on the Indian economic system. Since last few months Indian rupee came under great emphasis as abroad investors are paring their exposure to Asia ‘s third-largest economic system amid international uncertainness and mounting concerns over the domestic economic system. In 2009 – 2010 the exchange rate was vibrating around the 43 – 45 rupees per US Dollar degree. And now it is about 55 – 56 degrees, the chief grounds to analyze are addition in import measure, higher rising prices, financial misdirection and all ensuing in higher cost of borrowing. The rupee has lost more than 15 % of its value this twelvemonth, doing it one of the worst executing currencies in Asia.
This paper reviews the likely grounds for this depreciation of the rupee and the mentality for the same. It besides reflects on the policy options to assist forestall the depreciation of the Rupee. This paper will foremost discourse about the economic system of currency to give an overview of the job and the factors related to it.
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Afterwards it will be analyzing the causes of the Indian rupee depreciation with regard to the Indian economic system and the planetary economic system. And after that it will analyze the impact of the same on trade and concern. Finally, urging the policy actions in response of the falling currency.
II. LITERATURE REVIEW:
These documents include the work which have been used as a footing or mention for explicating the policies sing ‘The Indian Rupee Crisis ‘ .
Singhal, Shelly ( 2011 ) , “ AN ANALYTICAL STUDY ON INDIAN CURRENCY RUPEE DEPRECIATION AGAINST THE US DOLLAR AND ITS ECONOMIC IMPACT ” , Arth Prabhand: A Journal of Economics and Management, Vol.1 Issue 1, April 2012, Pp. 73-83.
This paper chiefly takes into history the Indian Rupee Crisis chiefly during the last one-fourth of 2011 & A ; the impact it had on the Indian Economy so & As ; now. The paper foremost summarizes the mentality of the Indian Economy, its economical & A ; fiscal history. It shows how the tendency of the Indian rupee has been from 1991 to 2011 & A ; the chief grounds behind the fluctuations in the Indian Rupee.
After finding the grounds behind the fluctuations it talks about the depreciation in the Rupee against the Dollar over the last fiscal twelvemonth ( 2011-12 ) . Basic grounds identified in the paper are:
Persistent Fiscal Deficits
Lack of Reforms
Global Economic Scenario
After the grounds of the ruin are determined, policy measures* have been identified in order to command the depreciation of the Indian Rupee. Furthermore the function of RBI has besides been identified as to what all steps can be taken by them to control the state of affairs.
Rupee Exchange Depreciation: Impact Analysis available at hypertext transfer protocol: //www.assocham.org/arb/general/Rupee_Exchange_Depreciation_Impact_Analysis-2012.pdf ( Accessed on 8th October 2012 ) .
This paper assesses the impact Indian Rupee Depreciation have had on different sectors of the Indian Economy. It chiefly takes into history the imported goods as the chief countries which have been impacted by the autumn in the Indian Rupee against the US Dollar.
India is hapless in oil resources and is to a great extent dependent on coal and foreign oil imports for its energy demands. Therefore, oil imports & A ; other imports form a major beginning for India when it comes to its energy demands. Other imported merchandises are: machinery, treasures, fertilisers and chemicals. Main import spouses are European Union, Saudi Arabia and United States.
The paper besides discusses the impact of depreciation on the industry, the importers & A ; the industry participants. India being a major importer has assorted houses which have immense imports on history of the natural stuffs. With the depreciation in Indian rupee these houses have incurred immense forex losingss. Therefore, in order to command their losingss these houses are increasing monetary values of the goods they sell which in bend has led to lift in rising prices. Furthermore, the economic growing in India has slowed down with these factors playing a major function in it. Therefore, Indian Rupee depreciation has led to the decelerating down of the economic system as whole.
Exchange Rate Slide – What Impact Is It Having available at hypertext transfer protocol: //www.assocham.org/arb/general/Exchange_Rate_Study.pdf ( Accessed on 8th October 2012 ) .
This paper besides accounts for the impact that the Indian Rupee has had on the Indian Economy. It has shown the fluctuations of the Indian Rupee with regard to assorted major currencies like the USD, Pound Sterling, Japanese Yen & A ; the Euro. The impact of depreciation on the imports have besides been considered in the paper. The effects these impacts will hold on the Indian Economy forms the following portion of the paper. Furthermore, impact on the debt in the corporate sector has besides been considered. Similar to the old documents a brief analysis of the impact has been done & A ; in the terminal policy measures* have been discussed to control this critical state of affairs.
( *The policies recommended in the paper have been discussed in the Policy Recommendations portion below. )
III. WHAT ARE THE FACTORS AFFECTING THE CURRENCY Ratess:
In any state, finding the currency rates fluctuations is a really tough undertaking. Therefore, there are assorted factors which can be considered in order to find the grounds behind such fluctuations of the place currency. Some of those factors are:
Current Account Surplus/Deficit: A state holding more exports than its imports has a current history excess. In such economic sciences the currency appreciates while in shortage states, the currency depreciates.
Interest Rate Derived functions: This is based on involvement rate para theory. Harmonizing to this factor, states holding higher involvement rates have a depreciative exchange rate. If it does non go on, there is a instance for arbitrage for foreign investors till the arbitrage chance disappears from the market.
Inflation: Higher rising prices leads to cardinal Bankss increasing policy rates which invites foreign capital on history of involvement rate arbitrages. This leads to farther grasp of the currency. However, over short-run foreign investors see rising prices as a impermanent job and still put in the domestic economic system. If rising prices becomes a drawn-out one, it leads to overall deterioration of economic chances and capital escapes and finally depreciates the currency. Apart from this, rising prices besides helps understand the existent alterations in a value of currency.
Global economic conditions: Barring domestic conditions, planetary conditions impact the currency motion every bit good. In times of high uncertainness as seen recently, most currencies normally depreciate against US Dollar as it is seen as a safe haven currency.
Keeping the above factors in head we have determined as to what all are the possible grounds for the depreciation of the Indian Rupee against the US Dollar over the last fiscal twelvemonth.
IV. RUPEE DEPRECIATION: Cause FOR THE DECLINE
The Indian Rupee has depreciated significantly against the US Dollar taging a new hazard for Indian economic system. Till the beginning of the fiscal twelvemonth really few had expected Rupee to deprecate with most suggesting towards either grasp in the rupee degrees. Those few who had even anticipated may non hold imagined the graduated table of depreciation with rupee touching a new depression of around Rs 57 to the US Dollar.
Figure: The Depreciating Indian Rupee against
The US Dollar ( Oct’11- Oct’12 )
The graph above shows that the Indian Rupee was near the Rs49/USD exchange rate during October 2011. This portion examines the chief grounds behind the autumn from Rs49/USD in October 2011 to Rs57/USD in June 2012.
High financial shortages: In the last fiscal twelvemonth ( 2010-11 ) , the financial shortages remained high. The authorities therefore, projected a financial shortage mark of 4.6 % for 2011-12 but sing the economic status it is likely to be much higher on history of higher subsidies. The mark figure was once more questioned by the markets merely after the budget and projected the Numberss could be much higher. Therefore, this has become an of import issue for the Indian Govt.
High rising prices: Inflation in India has remained around 9-10 % for about two old ages now. Inflation still remains high with nucleus rising prices itself about 8 % degrees. In 2007-08, despite high rising prices and high involvement rates, capital influxs were abundant because markets believed rising prices was impermanent. As India recovered from the Global Financial Crisis, the same was assumed by the investors. However, as rising prices remained relentless and became a more structural issue investors reversed their outlooks on Indian economic system.
Lack of reforms: There have been really few meaningful reforms in the last few old ages in Indian economic system. The authorities tried to change by reversal this perceptual experience for which it announced FDI in retail but had to keep back amidst immense fad from both resistance and Alliess. This has farther made investors negative over the Indian economic system. As FII influxs are traveling to be hard given the unsure planetary conditions, the focal point has to be on FDI.
Continued Global uncertainness: With the planetary economic system go oning to stay in a extremely unsure zone, force per unit area on most currencies against the US Dollar has increased. The Euro Economic Crisis is one of the chief grounds for the depreciation of many currencies with regard to the US Dollar as big institutional investors have moved out of the Euro and into the Dollar. In malice of the fact that the debt of the US authorities ( $ 14.6 trillion ) is about equal to its GDP ( $ 15 trillion ) , the universe at big is sing the dollar to be a safe oasis and traveling money into it by purchasing US exchequer bonds. Therefore, the states that have lost value against the USD have lost it in changing grades.
All these grounds together have led to crisp depreciation of the rupee. The rupee has depreciated by about 15 % against USD from Oct’11 to Oct’12.
V. IMPACT ANALYSIS OF THE INDIAN RUPEE CRISIS
India is hapless in oil resources and is presently to a great extent dependent on coal and foreign oil imports for its energy demands. Therefore, oil imports & A ; other imports form a major beginning for India when it comes to the energy demands. Other imported merchandises are: machinery, treasures, fertilisers and chemicals. Main import spouses are European Union, Saudi Arabia and United States.
Companies utilizing domestic inputs & A ; exporting bulk of their end product to the US benefited the most due to the autumn in the rupee against the dollar.
Companies holding high degree of imports & A ; exports to USA, with the exports transcending the imports benefited every bit good.
India ‘s oil import measure rose by 43 % at Rs 726,386 Crores against rough oil and fuel merchandise imports of 186.7 million metric ton in FY-2012.
Importers were required to pay more for the same measure being imported. For illustration, the measure ordered at the exchange rate in March 2012 was bing higher in June 2012 due to the autumn in the Rupee.
The houses which were dependent on the imported resources incurred immense foreign exchange losingss because of the autumn in the rupee against the dollar goods they imported.
Firms had addition in their disbursals on history of the falling rupee, therefore, in order to retain net income borders, monetary values of trade goods related to oil & A ; other trade goods increased.
Addition in import monetary values of indispensable trade goods such as rough oil, fertiliser, pulsations, comestible oils, coal and other industrial natural stuffs increased the monetary values of the concluding goods. Thereby doing it costlier for the consumers and hence rising prices pushed up further.
The figure shows the monetary value hiking in gasoline after the rupee autumn i.e. terminal of Nov 2011 – April 2012.
The falling rupee besides took off much of the benefits of the worsening international petroleum oil monetary values.
The falling rupee overall hit the economic growing of India as rising prices remained high because of the rise in monetary values of goods holding imported natural stuffs.
VI. POLICY RECOMMENDATIONS:
The Research documents discussed earlier have looked upon assorted policy recommendations which can be used to control the current exchange rate jobs being faced by the Indian Economy. Some of the policies discussed in the documents are:
Oil import demand could be staggered and purchases co-ordinated so that at no point there is undue bundling of imports.
The authorities can take enterprises which encourage and increase the flow of foreign investings into India. Three recent stairss taken by the authorities be it the pension fund FDI bound or the addition in the investing bound investors in authorities security and corporate bonds are the stairss in the right way.
The authorities can do investings attractive and invites long term FDI debt financess in substructure sector.
Government can see impermanent import compaction.
FDI in the air power & A ; retail industry can besides pull foreign investors.
Agarwal, Amol ( 2011 ) , “ RUPEE Depreciation: Probable CAUSES AND OUTLOOK ” , Dec. 21, 2011.
Chauhan, Rohit ( 2012 ) , “ Measure THE IMPACT OF RUPEE DEPRECIATION ” , May 30, 2012.
Exchange RATE SLIDE – WHAT IMPACT IS IT HAVING available at hypertext transfer protocol: //www.assocham.org/arb/general/Exchange_Rate_Study.pdf ( Accessed on 8th October 2012 ) .
HISTORICAL INDIAN RUPEE EXCHANGE RATE available at hypertext transfer protocol: //www.oanda.com/currency/historical-rates/ ( Accessed on 7th October 2012 ) .
Inflation Ratess OVER THE YEARS available at hypertext transfer protocol: //business.mapsofindia.com/inflation/ ( Accessed on 7th October 2012 ) .
RUPEE EXCHANGE DEPRECIATION: Impact ANALYSIS available at hypertext transfer protocol: //www.assocham.org/arb/general/Rupee_Exchange_Depreciation_Impact_Analysis-2012.pdf ( Accessed on 8th October 2012 ) .
Singhal, Shelly ( 2011 ) , “ AN ANALYTICAL STUDY ON INDIAN CURRENCY RUPEE DEPRECIATION AGAINST THE US DOLLAR AND ITS ECONOMIC IMPACT ” , Arth Prabhand: A Journal of Economics and Management, Vol.1 Issue 1, April 2012, Pg. 73-83.
The Economic Times, “ INDIA ‘S OIL IMPORT BILL JUMPS ” , August 24, 2012, Pg. 6.