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group 6: at current levels of inr, rbi must

aggressively support inr just as japan did with yen,

in may 2011 in the face of rating downgrade.

With current levels of INR going upto 52.36 per dollar, INR is the worst performing Asian

currency. Falling rupee is detrimental to the growth of the economy. India is high on inflation

and regulators should step in and contain volatility. Otherwise growth is bound to suffer

which is already slowing down. There may be chance for short term profitability but in the

long run the fiscal deficit will go for a toss.

The policies formulated by Japan have helped maintain the stability of the yen even during

times when it seemed it would be affected adversely.

Steps taken by Japan

Noda pledged stronger market oversight and unveiled a $100 billion facility aimed at helpingto weaken the yen after repeated attempts to cool the unit through market intervention, but theplan underwhelmed markets.

The programme would encourage firms to exchange the Japanese currency for foreigndenominated assets, with the one-year facility aimed at encouraging merger andacquisition activity to make the most of the strong unit.

Japan is set to issue more bonds later this year to help finance reconstruction from theMarch disaster.

In addition to its structural debt problems, Japan faces a bill amounting to 15-20 trillion for

recovery work following the March 11 earthquake and tsunami. Given the weak growth

prospects, it is obvious that Japan will find the servicing of its burgeoning public debt very

difficult.

Weak INR

INR touched all time low of 52.73 on Nov 22. Investors prefer safe heaven currencies like

the US dollar in the present times. European banks are not willing to lend to emerging

markets given the pressure in debt crisis in the Euro Zone.

The increased uncertainty in the Euro Zone on account of the sovereign debt crisis has led to

shifting of capital from Europe to US which has hardened the US dollar against most

currencies.

Should the authorities support the INR like what was done in Japan for Yen?

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Against:

1. The current phenomenon has surfaced as global dynamics which create demandsupply equilibrium come in to play. And, its not wise to intervene and fight the global

market when we dont have enough capacity.

2. High level of inflation alone is not responsible for the continuous plunge of the Rateof INR against the USD. The rising USD demand by the oil companies is also a major

reason. The Indian Oil Corporation needs $200 million per day. How can one even

imagine to fight reduce this dollar demand.

3. Another monetary action, and that too aggressive may lead to a further dampening ofthe spirit of the industries and the economy as a whole, as it has direct negative

impact on industrial output and also badly affects the industries where demand is loan

driven.

4. The measures being provided by RBI would cater to only the long-term problems thusignoring the short term problems that arise for the Indian economy.

5. Though RBI has declared measures to control the decline of the rupee, it would not besufficient as they fail to give importance to factors such as rise in the price of oil and

energy which play an equally important role in the decline of the rupee.

For:

1. Since Japan is an export driven economy, a rising Yen against the USD would alwaysbe a major problem for the Japanese economy. India being a major importer of crudeoil and other many commodities, the import dependent industries may be in serious

trouble as import costs would rise as the INR keeps falling continuously.

So, some efforts on the part of the RBI to curb the USD/INR demand-supply

disequilibrium would be a welcome step.

2. FIIs have been flowing out of the nation and measures to contain flight of capitalneeds to be taken.

3. Relaxed rules on currency swap hedges have also been introduced so as to reduce theeffect of the volatile currency market. This helps to bring about a stable performance

without the fear of losing too much due to constant change.

Our Opinion

The weak INR definitely needs support of the regulatory authorities. In the long run the

economic growth can be sustained through the measures taken by the authorities. In the long

run the deficits would go topsy turvy otherwise. Only with the support of the regulatory

authorities can any order be brought in the economy and the weak INR.

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The RBIs directive to the Indian companies to bring back the offshore funds raisedthrough External Commercial borrowings (ECBs), so that they can be parked with

Indian banks can prove to be helpful.

The RBI has increased interest rates on foreign currency deposits which woulddefinitely attract more deposits provided the lucrative offer. As deposits improve so

does the foreign exchange reserve, which can help in improvement of the rupee

performance.

RBI is looking at the currency depreciation only from a macro perspective and intendsto intervene only if the macro environment seems to be adversely affected. Ignoring

the micro environment could lead to new levels of inflation. Control measures

should be taken at both the micro and the macro levels.

What RBI should do is take the help of big corporations and exporters. As has beenseen that the sale of USD by these parties had led to the rupee closing at 29 paise

higher on 24th Nov.

Submitted by:

1020046 ITI MEHROTRA

1020157 SMRATA SINGH

1020124 PRABHU KUMAR B

1020056 SMITA GARG

1020125 PRASHANT SHOURYA

1020007 ANISH SINGH