Prepared By:

Vikash Kr Gupta

BBA 1st year

CONTENTS

Currency Appreciation and Depreciation

Why don’t we need a depreciating INR?

Exchange Rate or Conversion Rate

The Negative Impact – Rupee Depreciation

The Positive Impact – Rupee Depreciation

Effect of depreciation of Rupee on Indian lifestyle

Causes

The Rope – That can pull INR out

Is the India only loser?

In a Nut Shell…

INTRODUCTION

Depreciation in rupee has become a big worry for the Indian Government and breaking news for the news channels and newspapers. Rupee has declined to its peak level in the month of July, 2013 and is expected to continue in coming days.

Due to stagnant reforms, and declining foreign investment, rupee started depreciating in the early 2013. As a result, the Indian Rupee dropped to 68.80 per dollar. Various measures were announced by the Government prior to this drop to prevent it from dropping further. But, none managed to slow down the depreciation!

“Dollar on an escalator, rupee on a ventilator, nation in the ICU”, reads one twitter joke!

CURRENCY APPRECIATION AND

DEPRECIATION

o Appreciation in any currency means when we exchange that currency with another currency, we will get more foreign currency or we need to pay less home country currency.

o On the other hand depreciation in a currency means when we exchange that currency with another currency, we will get less foreign currency or we need to pay more home country currency.

o For example:

Few months back, 1 USD= INR 45 which means for each 1$, we need to pay INR 45.While in current situation, 1USD= INR 60 which means for each 1$, we need to shell out INR 60.

Thus we need to pay more INR compared to previous situation.

Thus in this case, Rupee has depreciated and USD has appreciated!

WHY DON’T WE NEED A DEPRECIATING INR?

The persistent decline in rupee is a cause of concern. Depreciation leads to imports becoming costlier which is a worry for India as it meets most of its oil demand via imports.

Apart from oil, prices of other imported commodities like metals, gold etc will also rise pushing overall inflation higher. Even if prices of global oil and commodities decline, the Indian consumers might not benefit as depreciation will negate the impact.

The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country, as reflected in the high and persistent current account deficits month after month, the domestic costs will rise on account of rupee depreciation.

Exchange rate risk also drives away foreign investors which in turn depreciates the local currency. Indian Rupee is currently caught in this vicious cycle; it will have to find a stable level to regain investors’ confidence.

The depreciating rupee has serious effects on the external debt figures of the nation. The total external debt has increased by Rs. 2186.8 billion to Rs 16384.9 billion by the end of November 2011.

EXCHANGE RATE OR CONVERSION RATE

Each country has its own currency and when we convert currency of one country with that of another country, it is called conversion rate or exchange rate between the two countries.

For example:

1USD= INR60 which means if we convert 1 USD in INR we will get Rs.60.

The conversion rate fluctuates on timely basis based on various factors such as demand and supply of each currency, inflation rate in country, interest rate prevailing in the country etc.

THE NEGATIVE IMPACT – RUPEE

DEPRECIATION

IMPORTERSImporters will strongly feel the pinch of falling rupee as they will be forced to

pay more rupees on importing products.

IMPORTED GOODS:

Buying imported stuff will become a very costly affair. You will have to shell out extra on imported goods. For instance if you bought a product valued USD 1, you paid around Rs 54 (months ago) but you will now have to shell out close to Rs 68 for the same product.

FUEL PRICE

A weak rupee will increase the burden of Oil Marketing Companies (OMCs) and this will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel.

TRANSPORTATION: If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation.

STUDENTS STUDYING ABROADStudents who are studying abroad will bear the brunt most owing to

depreciating rupee. Expenses incurred towards the university/college fee as well as that of living will shoot up, thereby spelling a huge burden on the students.

TOURISMThe depreciating rupee will surely be a dampener if you are planning your

holiday abroad. Your travel charges as well as hotel charges will escalate drastically, let alone shopping and other miscellaneous spending activity.

THE POSITIVE IMPACT – RUPEE

DEPRECIATION

EXPORTERS

A feeble rupee will bring delight to the exporters as goods exported abroad will fetch dollars which in return will translate into more rupees.

COMPETITION: A weak rupee will make Indian produce more competitive in global markets which will be fruitful for India's exports.

OVERSEAS INDIANS

‘Money saved is money earned.’

Depreciation of rupee is certainly a good news for the overseas Indians. Those working abroad can gain more on remitting money to their homeland.

TOURISM

Travel and tourism is a sector which will benefit from the depreciation of the rupee. If a tourist comes to India and the rupee devaluates then it would become cheaper for him.

IT FIRMS

Despite a power crisis and political uncertainty, the IT sector here has registered total revenues of Rs. 64,354 crore in financial year (FY) 2012-13, as against Rs. 53,246 in FY11-12.

The Rupee’s fall vis-à-vis the US dollar is set to ring in a windfall for IT companies in the city and elsewhere in the State – at least in the second quarter between July-September. Industry observers say that the phenomenon would benefit the companies at least in the short-term.

“There are definitely going to be good results in the short-term for IT companies. But, things will get difficult down the line when the rupee fall continues and the cost of hiring IT workforce and managing offshore operations increase,” feels president of the Federation of Andhra Pradesh Chambers and Commerce Industry (FAPCCI) Srinivas Ayyadevara.

Most IT companies in India service clients from US and Europe.

There is also the question of expense of staff working in US, EU and other countries, which are based on US dollar, Euro etc. So, everything is not that rosy,” feels IT’s AP’s secretary Bipin Chandra Pendyala.

Then there is the issue of companies facing tough times because they import hi-tech equipment from US and Europe.

“For such companies, depreciation hurts. We do buy good amount of equipment including software, cameras, recorders etc from USA and we end up paying lot more money. It’s hard to pass this additional cost to our customers here in India as they don’t like seeing additional incremental cost,” says Vidteq.com founder T. Chandra Mohan Reddy.

EFFECT OF DEPRECIATION OF RUPEE

ON INDIAN LIFESTYLE

All eyes are riveted on the rupee right now, when the focus should really be on inflation stemming from the currency depreciation, believes PRANAB SEN, chairman of the National Statistics Commission.What we need now is a tight monetary policy, he told Neeraj Thakur.

EFFECT ON GROWTHBy and large , depreciation of currency actually good

for growth. However , it can lead to inflation and you need to control it .And therefore ,that suggestion that comes out is to have a tight monetary policy.

But the fall in currency value is not helping growth.Some suggests the use of foreign exchange reserves to prop up the rupees.

EFFECT ON GROWTHThe rupee value is an effect not the cause.

The RBI has said “we are agnostic about any particular level of rupees”.

We have done everything to control CAD opened up various sectors to FDI , increased import duty on gold . Still nothing seems to be working.

Infact ,increase in import duties will not necessarily help curb gold imports

Initially , due to inflation people start financing the increased cost of living through their saving , which is why it spoils over into CAD.

Industry specific reports offers insight into market size and market share in India ; as well as industry trend in each specific industry.

The consumer lifestyles in India reports examines

national lifestyle habits , ranging from health and

living standards income and earning patterns , eating

and drinking habbits , to home ownership trends.

Result of depreciation of rupees in 2012The big story of 2012 was the sharp increase on taxes

across several states across in India that pushed us retail price .

Wine grew 10% in 2012 , in terms of total volume sales .

Cider/perry continues to be insignificant in India .Sales of alcoholic drinks in India grew by 9%.

Result of depreciation of rupees in 2012 Homes & Gardens in India

Growth of the overall economy in India slowed in 2012 due to high inflation and more subdued consumer spending.

The effected homes and gardens , as a result of which growth in 2012 was at its lowest of the reviews period .

However , in 2012 , ended on a positive note as sales started showing signs of recovery in the last two months of following the festival of Diwali .

Result of depreciation of rupees in 2012Premiumisation still a dominated theme.

Unbranded players dominated.

Home and garden specialist retailers the key distribution channel.

100% FDI in single-branded retail and 51% FDI in multi-branded retail expected to prove a boost to home and gardens.

Strong growth expectation in the short term.

CAUSES

BASIC LAWS OF ECONOMICS

As per the rudimentary laws of economics if the demand for USD in India exceeds its supply then its worth will go up and that of the INR will come down in that respect. It may be that importers are the major entities who are in need of the dollar for making their payments.

Another possibility here could be that the Foreign Institutional Investors are withdrawing their investments in the country and taking them elsewhere.

PRICE OF CRUDE OIL

The worth of crude oil has been a major bane for India since it has to bring in the majority of its requirement from outside the country.

The demand for oil in India has been going up every year and this has led to the present situation.

All over the world, the price of oil is given in dollars.

This implies that as and when the demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a need for more dollars to pay the suppliers.

This also results in a situation where the worth of the INR decreases significantly in comparison to the dollar.

PERFORMANCE OF DOLLAR WITH RESPECT TO OTHER CURRENCIES

o The central banks across Japan and countries in the Euro zone have been bringing out a lot of money and this has meant that both Yen and Euro have lost their value.

o Compared to this the US Federal Reserve is giving hints that it will end the fiscal stimulus so that the dollar becomes stronger with respect to other currencies such as the Indian Rupee at least for the time being.

o Till now in 2013, the US dollar index has become stronger by 1.91%.

o In an interview with the Economic Times, the CO-CIO of Birla Sun Life Mutual Fund, Mahesh Patil has stated that the increase in worth of USD is the major reason behind the depreciation of the INR.

VOLATILITY IN EQUITY MARKET

o The equity markets in India have been volatile for a certain period of time. This has put the FIIs into a dilemma as to whether they should be investing in India or not.

In recent times their investments have touched an unprecedented level and so if they pull out then the inflow will go down as well.

As per a report in Business Today, the international investors in India have withdrawn to the tune of INR 44,162 crore during June 2013 and this is a record amount. This has also created a current account deficit (CAD) that is only increasing, thus contributing significantly to the depreciation of the INR.

EFFECTS OF EQUITY MARKET PROBLMS ON INVESTORS

Now if the INR becomes weak then it will affect the investors who are putting their money in India.

CURRENT ACCOUNT DEFICIT

This situation arises when a country's' imports are more than its exports. Due to which it needs to buy more foreign currency to pay off the debts. Increase in the demand of foreign currency will ultimately reduce the value of that country's currency. India is facing a high current account deficit these days which led to fall in rupee value.

WITHDRAWAL OF INVESTORS

Recently ArcelorMittal and Posco decided to pull out from their projects in India. Posco did not go ahead with a steel plant worth INR 30,000 crore that was supposed to be built in Karnataka and ArcelorMittal withdrew from setting up a steel plant in Odisha that was supposed to cost around 52,000 crore.

There were lot of delays and problems related to acquiring land for the project.

In fact in 2012-13 the Indian companies have spent more outside India compared to FIIs in India.

DOWNGRADING OF INDIAN STOCKS

Goldman Sachs, one of the leading banks in the world, has rated Indian stocks as being underweight. It has also asked investors to be careful given the concerns surrounding the recovery of the growth of Indian economy.

INFLATION

It is one of most crucial factors in determining the currency exchange rate.

We are experiencing very high inflation rate in India now. This will decrease the purchasing power against other currencies and will lead to depreciation of the Indian currency.

CONTRACTION OF INDIAN ECONOMY

The various important sectors of Indian economy such as manufacturing, mining and agriculture have seen poor growth in 2013 and this has made them less appealing propositions for the investors.

During June 2013, the aggregate industrial production in India reduced by 2.2 per cent and in July 2013 the RBI predicted that in the present fiscal there would be a growth of 5.5% which was lesser than its previous prediction of 5.7%.

FUTURE PROSPECTS OF INR

• In spite of all that has been said above it will be foolish to write off the INR completely and say it shall not rise from the mire.

• Experts are saying that the government needs to take some short and medium term steps that will help the economy get back on its feet yet again.

• It is only through continued efforts that the Indian government will be able to retrieve the situation.

• However, it will take a Herculean effort to help the INR get back to the 55 mark.

POLITICAL PARALYSIS

In last few months, we have seen various corruption issues. The parliament is not functioning properly due to which several important Bills are pending.

The Government is not able to make any firm decisions relating to investment and finance to attract investors.

Due to political paralysis in country, the investors have taken a back seat which affected the inflow of funds and thereby led to depreciation in rupee.

CONDITION OF IMPORT BILL

India’s import bill has been going up of late and most of this can be attributed to gold. This has also hampered India’s efforts to arrest the slide of the INR. Gold alone takes up more than 10 per cent of India’s import bill – in April 2013, 141 tons of gold were imported and it went up to 162 during May.

The government took some measures that restricted gold imports to 31 tons during June but once again in the first 25 days in July the imports went up to 45 tons.

THE ROPE – THAT CAN PULL INR OUT

MEASURES BY RBI:

1. USING FOREX RESERVES

RBI can sell forex reserves and buy Indian Rupees leading to demand for rupee. But using forex reserves poses risk also, as using them up in large quantities to prevent depreciation may result in a deterioration of confidence in the economy's ability to meet even its short-term external obligations.

And not using reserves to prevent currency depreciation poses the risk that the exchange rate will spiral out of control. Since both outcomes are undesirable, the appropriate policy response is to find a balance.

Recent data shows that RBI had indeed intervened by selling forex reserves selectively to support Rupee.

PERIOD FOREX RESERVES (In millions of USD)

2010-11 3,04,818

2011-12 2,94,398

2. RAISING INTEREST RATES

The rationale is to prevent sudden capital outflows and ultimately lead to higher capital inflows. But India’s interest rates are already higher than most countries. This was done to tame inflationary expectations. So further raising interest rates would lead to lower growth levels

3. MAKE INVESTMENTS ATTRACTIVE- EASING CAPITAL CONTROLS

RBI can take steps to increase the supply of foreign currency by expanding market participation to support Rupee.

RBI can increase the FII limit on investment in government and corporate debt instruments.

It can invite long term FDI debt funds in infrastructure sector. The ceiling for External Commercial Borrowings can be enhanced to allow more ECB borrowings.

MEASURES BY GOVERNMENT:

Government should take some measures to bring FDI and create a healthy environment for economic growth. Key policy reforms that should be initiated includes:

Rolling of Goods and Services Tax (GST)

Direct Tax Code (DTC)

FDI in aviation and retail

Companies Bill and diesel decontrol

Efforts should be made to invite FDI but much more needs to be done especially after the holdback of retail FDI and recent criticisms of policy paralysis.

The government took steps recently to loosen rules for portfolio investment in the Indian market, indicating its desire to sustain external inflows.

The measure to increase External Commercial Borrowings (ECB) to $10bn will help in borrowing in dollar at a less cost.

It may take similar steps to encourage FDI as well, helping sustain external funding.

IS THE INDIA ONLY LOSER?

The ongoing euro zone crisis and declining demand in the developed nations has created risk-aversion in the markets.

It explains why China's growth has decelerated so acutely and also India's. It also tells us that it is the global factor that is primarily responsible for India's economy running into rough weather not coalition politics, lack of leadership, corruption, assembly elections or any of the things we have been hearing about.

CURRENCY JUNE 2011 JUNE 2012 % Change

INR 44.8448 57.135 -21.510

Brazilian Real 1.57794 2.07165 -23.831

Russian Rouble 27.9248 32.9582 -15.272

Chinese Yuan 6.47807 6.35759 1.895

CONCLUSION

Above data shows that INR is not the only currency depreciating.

Except for China almost every developing country has shown a deprecating pressure on their currency.

Not everyone can be blamed for poor monetary policy or ineffective governance.

IN A NUT SHELL

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

Grim global economic outlook along with high inflation, widening current account deficit and FII outflows have contributed to this fall.

RBI has responded with timely interventions by selling dollars intermittently. But in times of global uncertainty, investors prefer USD as a safe haven.

To attract investments, 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.

Government can create a stable political and economic environment.

However, a lot depends on the Global economic outlook and the future of Euro zone which will determine the future of INR.