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Article Review: After being ravaged, 2014 has been a comeback year for the rupee Page 1

Article Review:

After being ravaged, 2014 has

been a comeback

year for the rupee MMS 1 Roll NUMBERS M14051 TO M14060

Name Roll No

Nikita Kale M14051

Aniket Kalode M14052

Kalpesh Mantri M14053

Keshav Kalra M14054

Mangesh Kamble M14055

Amit Karad M14057

Eshita Karnawat M14058

Rohit Kaul M14059

Naila Kazi M14060

2015

1/11/2015


1. Article Author: The article is written by Anindya Banerjee, Analyst, Kotak Securities. It was published in The Financial Express on 4th Jan 2015 (released on website on 3rd jan 2015

at 04:12 p.m. The link for the article can be found here: http://www.financialexpress.com/article/industry/banking-finance/after-being-ravaged-2014-

has-been-a-comeback-year-for-the-indian-rupee-anindya-banerjee/25674/

2. Summary What the article sets out to do ? This article explains how the Indian Rupee has recovered in 2014 after the dismal showing in

2013. After a lot of domestic headwinds in 2013 which included an unstable government at the center

combined with high inflationary pressures, a strong greenback, weak monetary and fiscal policies, the

rupee has managed to stage a comeback in 2014 thanks to a stable political mandate and robust central

banking by the new governor of RBI- Mr. Raghuram Rajan. It says that by keeping interest rates high

throughout, Mr. Rajan has encouraged savings in the economy thereby giving people good returns on

their savings which has managed to keep the inflation under control. Thus by pursuing anti-inflationary

policies, Mr. Rajan has ensured our currency- INR, has remained stable throughout. The article later moves

on to discuss the effects of the strong US dollar and the economic downturn globally on the commodity

market in India, and how it has caused a deflation in the commodity prices in such emerging markets thus

affecting the rural income and consumption. This deflation is commodity prices along with a bearish real

estate might have an adverse impact on the domestic sector which needs to be looked into.

3. Theoretical assumptions in the article: The author has assumed that the hard asset deflation and financial asset boom in the emerging market

like India would continue in 2015 and bring about deflationary trends causing stability in the rupee. It

has attributed this to the strong US dollar and the economic downturn taking place worldwide.

According to him, the financial asset boom would ensure steady flow of capital in the debt and equity

markets in India. However, it has assumed that these conditions are sufficient enough for inflation to

die down and cause a stability in the rupee. It has ignored the balance of trade figures for India, reflecting

the all payments made for goods, services, interest and dividends. If the country requires more foreign

currency than it receives through sale of exports, it supplies more of its own foreign currency than

foreigners demand for its products. This excess demand for foreign currency would thus lower the

countrys exchange rate until domestic goods and services are cheap enough for foreigners. Thus these

factors should also be taken into consideration.

4. Concepts/issues relating to the article & critical analysis a) The article describes the decreasing downward pressures on Indian rupee due to an improving

PMI (Purchasing Managers Index) a composite indicator designed to give an accurate overview


of the manufacturing operating conditions climbed to a 2 year high of 54.5 in December up

from 53.3 in the previous month and at an overall 2 year high. This was due to acceleration in the

new orders from the domestic as well as international markets and a strong increase in the

output. The core sector growth which has a 38% weightage in the Index of Industrial production

too rose by 6.7% y/y.

Source: India PMI report- HSBC

b) The second issue discussed is the fightback in the rupee in 2014 due to stable political mandate

and an efficient central bank governor Mr. Raghuram Rajan - with a primary objective to control

inflation (as shown by the appointment of the Urjit Patel committee which has focused on CPI

inflation as a target). The rupee had degenerated in the past due to various factors including low

foreign exchange reserves (In 2013, Indias forex reserves were enough to cover imports for only

seven months due to which the RBI couldnt intervene in the foreign markets). Indias current

account deficit was financed by foreign money for last many years. Withdrawal of money by

overseas investors due to slowdown of GDP in 2013-14 to less than 5%, was leading to weakening

of the rupee.


Source: www. xe.com

c) The third issue discussed is that of commodity prices and how gold,

which competes against the US dollar for supremacy had risen over the past decade till 2011.

However, from 2012 onwards, there has been a significant fall in the gold prices with the

greenback striking back due to US economy recovery.

Source: www.inflationdata.com

and supply). The subsidy burden of countries like India

(which are heavy oil importers) in addition to reduced import bills have resulted in lowering the

current account deficit leading to a strong INR.

d) Another issue apart from gold discussed is that of real estate prices as well as other commodity

prices (other than gold). Although deflation in these prices has kept the cost of our operations

down, it has also resulted in decrease in the rural consumption and income as India is largely as

agricultural economy, and decrease in commodity prices adds to the current account deficit woes

The year 2013 saw

rupee weakening as

the greenback gained

on it. The easing of the

fiscal stimulus package

or slowdown in

quantitative easing by

the U.S, took some

money out of

emerging markets in

India thereby adding

to some inflationary

pressures and

weakening the rupee.

This can be attributed to various

factors like the US shale gas

boom which reduced their

dependence on oil worldwide,

thus reducing the demand for

oil. The supply for oil from oil

producing countries like OPEC,

Russia, however, remained the

same causing a downward

spiral on the oil prices (due to

imbalance between demand


(reduced value of exports). There could be reduced outflows from India into the global market

and also vice versa thus retardng Indias growth thus depreciating the rupee further.

Adverse effects of depreciation in 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.

5. Recommendations/Suggestions for rupee appreciation that

author could have analyzed or talked about: 1. Measures by RBI:

a. 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.

Source: RBI

b. Raising Interest Rates: The rationale is to prevent sudden capital outflows and ultimately lead to

higher capital inflows. But Indias 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.

c. 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.

2. 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.

6. Conclusions The initial success story of India was clearly based on factor driven economy based on labour arbitrage

that is providing low cost labour in comparison to another country. At this stage development is sensitive

to global business cycle and exchange rate fluctuation. We need to move towards being investment driven

economy that is efficiency driven in the form of infrastructure development, improving skill of work force

and make that investment which translate into tangible productivity across the board. Final stage which

can make India to be developed economy is to be innovation driven economy that can create unique value

of India at global economy level. We need to accelerate reform process that would make economy

resistant to external shocks and changes in economy cycles and currency fluctuations. The bottom line is

our policy should concentrate on enhancing our capability in manufacturing, promote entrepreneurship

and provide incentive for innovations. We need to remember that the challenge which we are facing is

not only about currency risk but it is about moving to growth and development.

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 ECBs. Government can create a stable

political and economic environment. However, a lot depends on the Global economic outlook and the

future of Eurozone which will determine the future of INR.


7. References

http://www.thehindu.com/business/Economy/2014-no-easier-for-rupee-other-asian-

currencies-hsbc/article5553355.ece

http://www.tiagnet.com/files/Member%20News/AJSH-Rupee%202014-

November%202013.Pdf

http://online.barrons.com/articles/rupee-cushioned-against-stronger-u-s-dollar-

1419908209

http://profit.ndtv.com/news/cheat-sheet/article-10-reasons-why-the-rupee-is-sinking-

every-day-326160

http://www.commodityonline.com/

http://www.theguardian.com/business/2014/oct/29/us-federal-reserve-end-

quantitative-easing-programme

http://www.hsbc.com/news-and-insight/emerging-markets-pmi

http://www.bloomberg.com/news/2014-03-18/rupee-gains-of-35-seen-in-decisive-

victory-for-modi-currencies.html

http://www.xe.com/currencycharts/?from=USD&to=INR

8. Appendix/Annexure

We are presenting the graphs of the three factors affecting the rupee valuation to give a better picture

of how these variables have been fluctuating in the recent past. Also find the INR vs USD graph over the

past 40 years.


Exchange rate graph (1963 2013)

Source: www.xe.com

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