devaluationofindianrupee-130924022648-phpapp01

8/22/2019 devaluationofindianrupee-130924022648-phpapp01

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Best efforts by:

Pranav Singla

Sahil Gupta

XI-C


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Introduction1 Reasons2 Impact Conclusion


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The rupee is in trouble, and nobody seems quite surewhat to do about it. The Indian currency closed at

an all time low of 64.11 against the U.S. dollar onWednesday alongside a tumbling market, feedingwidespread anxiety over the fact that the governmenthas yet to curb the currencys downward trajectory

since it started tumbling in May. On Wednesday,Deutsche Bank issued a report saying the rupee mayreach as low as 70 in the coming months.


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2008 2009 2010 2011 2012 2013

INR 43.41 48.32 45.65 46.61 53.34 69

0

10

20

30

40

50

60

70

80

AxisTitle

INR


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Since India imports more goods (in valueterms) than it exports, it results in a

huge imbalance in trade, or what is

called a trade deficit.

India's Commerce Secretary Rahul

Khullar has predicted that the trade

deficit may be slightly lower in 2012-13,

due to falling global crude prices andrecent government curbs on gold imports.

A $1 per barrel decrease in crude price

reduces the country's deficit by $900m at

existing import volumes.


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Although India has become an attractivedestination which can attract foreigncapital as well as money from non-

resident citizens, it is not enough tomake up for the trade deficit.

But uncertainty about India'scommitment to economic reforms,

retrospective taxes, and policy paralysiswithin the government have forced

foreigners to either postpone theirinvestment decisions, or take money out

of Indian stock markets.


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The country's current accountdeficit - a broader measure of thetrade deficit - has also ballooned

due to the above reasons. In 2011-12, this deficit was more

than $74bn, a huge jump from lessthan $46bn a year ago. In 2012-13,

it may be even higher at $77bn. The result is that India's foreign

exchange reserves have droppedfrom a peak of $320bn in

September 2011 to $290bn now


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In such a situation, more people tend to sellrupees to buy dollars.

Importers scamper for dollars to cater for

their needs to buy goods abroad. Exporters cannot bring in enough dollars;

in fact, they keep their foreign earningsabroad as they expect the rupee to fall

further.

Meanwhile, foreign investors increase thedemand for dollars as they convert theirrupee assets into dollars to take their moneyout.

This demand-supply gap between the dollarand the rupee leads to devaluation


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This trend is accentuated by low growth and highinflation in India.

Annual economic growth of 6% in 2012-13.

Couple this with high inflation due to high food

and fuel prices. The rate of inflation may rise thisyear to double digits if the government is unableto curb its fiscal deficit.

In this scenario, most foreigners as well as

Indians tend to take money abroad, or keep itaway from India.

Global investors are also nervous about investingabroad in nations such as India due to theeconomic crisis in their respective countries.


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The Reserve Bank of India's bid to sell dollars

in the open market to restrict the rupee slide

has failed in the past few weeks and months.

This has complicated the situation further.

Once currency traders and speculators realize

that India's central bank is unable to manage

its exchange rate, and reduce the adverseimpact on its currency, they may enter the

market in a big way to sell the rupee.

As a result, the rupee may devalue more than

it should.


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Export-oriented sectors could benefit. Companies in the

information technology (IT) and textile sectors should benefit

from a weak rupee. Rupee depreciation helps IT companies .

The Indian rupee fell 0.7 per cent against the US dollar at

67.71 on the back of a weak trade data. The Indian rupee has

shed close to 25 per cent value over the past one year. It islikely to fall further.


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Corporate India is a net borrower of dollar and to that extent adepreciating rupee impacts its balance sheet adversely. Companies with

foreign debt on their books are badly impacted. With the rupee

depreciating against the dollar, these companies will need more rupees torepay their loans in dollar. This will increase their debt burden and lowertheir profits. Obviously, investors would do better to stay away fromcompanies with high foreign debt.

Bharti Airtel is one such company that has raised money overseas.

Then there are oil marketing companies like HPCL. BPCL and Indian Oil,which could also be negatively impacted. Since these companies importcrude oil, they will end up paying more rupees for the same dollar value ofimports.


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The value of the rupee in terms of dollarswill depend over time on the erosion of itsvalue in terms of purchasing power

internally. If inflation has been at say, 7percent, the rupee will have to fall to thatextent unless the importing countries arethemselves victims of inflation. That is notthe case. Hence, the rupee has fallen the

most compared to other currencies becausewe had nearly the highest inflation.Eventually, the rupee will stabilize, barringshort-term disturbances, after correcting the

loss in its domestic purchasing power.


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