General Changes Prior Intimation to RBI for Increase in Threshold Limits by Foreign Institutional Investors (FIIs) Investments by Foreign Venture Capital Investors (FVCIs) Investments by Qualified Financial Investors (QFIs) Import of capital goods/machinery/equipment (including second-hand machinery)- conversion to equity Transfer of shares where valuation norms are not met Limit for providing undertaking for transfer of security by PRI to PROI as gift has been raised Changes in Sectoral Caps Policy on commodity exchange Non-banking Finance Companies (NBFC) clarification on leasing Changes in FDI policy in single-brand retail trading and pharmaceuticals sector Foreign Investment in Pharmaceuticals Sector - Amendment to the Foreign Direct Investment Scheme
Banking - 74% Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100% Insurance - 26% Telecommunications - 74% Private petrol refining - 100% Construction development - 100% Coal & lignite - 74% Trading - 51% Electricity - 100% Pharmaceuticals - 100% Transportation infrastructure - 100 % Tourism - 100% Mining - 74% Advertising - 100% Airports - 74% Films - 100% Domestic airlines - 49% Mass transit - 100% Pollution control - 100% Print media - 26% for newspapers and current events, 100 % for scientific and technical periodicals
Continued Global uncertainty Current Account Deficit Capital Account flows Persistent inflation Interest Rate Difference Lack of reforms
Market Situation Economic Factors Factors Affecting INRPolitical Factors Special Factors
Demand/Supply FIIs situation of currencyBuying/Selling Floating rate of in Forex Currency Markets
Internal Factors External Factors• Industrial Deficit • Export Import• Fiscal Deficit • Loan sanctions by World Bank• GDP & GNP and IMF• Foreign Exchange Reserves • International oil and gold• Inflation Rate prices• Agricultural Rate and • FDI & Portfolio investments production• Different types of policy impacts( EXIM, Credit policy etc.)• Infrastructure
Delay in Delay in Political Implementati sanctioningInstability on of Policies budget
Events contributing in appreciation or depreciation of INR e.g., Indo –China War (1962) Indo-Pak War (1965) Bofors Scandal (1985) Pokhran Nuclear Test(1998) Kargil War (1999) CWG Scam Anna Hazare Campaign Recent Credit Rating
IT Sector– The sharp depreciation in rupee is expected to boost software sales and forex gains in coming months. Remittances, travel expenses and dividends could increase outflows, however, they are unlikely to cause an abrasion in the P&L position of these companies Textiles – With easing of cotton and cotton yarn prices and improved export realisations, the textile industry is expected to gain in the current forex environment. Mark-to-market losses on existing hedged positions and suitability of new hedging contracts would be crucial determinants of overall profitability. The man-made fibres segment could face some pressure on account of higher import costs of inputs and marked-to-market losses on expenses. Dollar-denominated expenses could lend some offsetting support to margins Pharmaceuticals – Companies in this industry are net exporters and stand to gains through higher export realisations enhanced by a depreciating rupee. Losses on external commercial borrowings (ECBs) and limited feasibility of conversion on foreign currency convertible bonds (FCCBs) pose a concern to these companies, but are not expected to be huge. Gems and jewellery – With increased investment demand amidst a volatile global economy, prices of gold and other metals, which are inputs to this industry, have witnessed steep rise. Consequently the sectors profitability could be affected. However, the sector is export-oriented and is expected to gain against the rupee depreciation trend. Ferrous metals – Steep rise in prices of coking coal and iron ore aggravated by adverse rupee movements is expected to continue to pressure raw material costs for this industry and allied segments. Rather muted industrial production and investment activity in this industry on account of a tighter monetary regime could further manifest in contraction of supply. Power – Thermal power plants are expected to face some strain on account of higher import costs of ferrous metals and petroleum products, which in turn are expected to remain firm in the near future. Furthermore, some OMCs have restated assets in rupee terms and are likely to face added pressure in coming months Fertilizers – The industry imports about 50% of its raw material requirement. In Q3 FY12, raw material expenses rose sharply by nearly 20% on account of higher input costs against elevated global prices and depreciation in rupee. Potassium chloride is one of the major import items and a decline is already being observed in the same. This trend is likely to continue in the coming months along with a decline in sales.
1966 Economic Crisis-From 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Furthermore, the Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sectors negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which had hitherto been a key factor in preventing devaluation of the rupee, was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which necessitated more devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest it has been in the period from 1965 to 1989 (Foundations, pp 195). Another factor leading to devaluation was the drought of 1965/1966 which resulted in a sharp rise in prices. At the end of 1969, the Indian Rupee was trading at around 13 British. A decade later, by 1979, it was trading at around 6 British pence. Finally by the end of 1989, the Indian Rupee had plunged to an all-time low of 3 British pence. This triggered a wave of irreversible liberalisation reforms away from populist measures.
1991 Economic crisis-In 1991, India still had a fixed exchange system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government budget deficits. This led the government to devalue the rupee. At the end of 1999, the Indian Rupee was devalued considerably.
Current Deregulation Of Petroleum Prices. (Earlier Government Used To Give Subsidies, But Not It Decide D To Let The Market Forces Determine The Price) Central Government Intends To Do Away With Various State Sales Taxes And Excise Duties And Combine Them All In A Comprehensive GST (Goods And Services Tax), It Is Not Implemented Yet But Will Be Pretty Soon In Next Year Or Two. The Various CECA And CEPA (Kind of Free Trade Agreements) With Malaysia And Singapore. Allowing Retail Giants Like Wal-mart To Open Shops In India. Supreme Court Monitored Investigation Of Indian Black Money Stashed Abroad. The Nuclear Fuel Supply Agreements With France, America Et Al.
The weighted average of a countrys currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one countrys currency, with each other country within the index.
The unadjusted weighted average value of a countrys currency relative to all major currencies being traded within an index or pool of currencies. The weights are determined by the importance a home country places on all other currencies traded within the pool, as measured by the balance of trade.
Used as indicators of external competitiveness. NEER is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies. The Reserve Bank of India (RBI) has replaced its five-country indices of nominal effective exchange rate (NEER) and real effective exchange rate (REER) with new six-currency indices. It is also revising its thirty six- country indices. As against the present practice of having three base years in the case of existing five-country indices, viz, 1991-92, 1993-94 and 2003-04, the last being a moving base updated every year to facilitate comparison with a more recent period, the new six-currency indices will have 1993-94 as fixed base and 2003-04 as a moving base, which will change every year as at present. The new six-currency indices will include USA, Eurozone, UK, Japan, China and Hong Kong SAR. The new indices will also have two new currencies — both Asian — the Chinese renminbi and the Hong Kong dollar. Two currencies in the existing five-country series, viz, French franc and Deutsche mark have been replaced by euro in the new indices.
Exporters: Exporters get their payment in dollar (or other forex currencies ) and convert into Indian Rupees, In the situation of falling rupee they get more Indian rupees . Thus a falling rupee is good for the exporters. Non-resident Indians : NRIs send money to their family regularly. In a falling rupee market, they can send more Indian rupees to their relatives. Hence in a situation of rupee becoming weak, NRIs and their relatives stand to gain. Receivers of fees and remuneration in foreign exchange: People doing online jobs for foreign companies from here and receive payment for that ( example Ad sense revenue) can get more Indian rupee equivalent and they gain when rupee is weak against dollar.
Expensive Importers: Importers face the opposite of exporters. In a falling rupee market, they have to pay more Indian Rupee to pay their imports in dollars. So they stand to lose . Indian tourists, students, Haj pilgrims going abroad: These category of people have to pay more Indian Rupees to fetch dollars to take care of their travel and needs abroad. So they are badly affected in a falling rupee market, which can unsettle their plans. Higher inflation Repayment of Loans
Growth deceleration not accompanied by lower inflation Outlook for growth lowered by almost all including RBI Lower private consumption demand Reserve Bank’s estimates suggest trend growth (non- inflationary) has fallen to 7.5% from 8%. Weak monsoon feeding into food inflation worries Currency depreciation could lead to imported inflation Already high fiscal deficit reduces maneuverability India is an outlier in many respects, particularly with respect to high fiscal deficit and persistent high inflation. Current account deficit at 4.2% in 2011-12 is above comfort levels
Large fiscal deficit and persistent inflation limits fiscal and monetary space for further stimulation. The centre’s gross fiscal deficit (GFD) higher at 5.8 per cent in 2011-12 against 4.9 per cent in 2010-11. Subsidies to GDP ratio – budget proposed cap of 2% Our peers seem to have better fiscal fundamentals than ours Even our inflation is one of the highest among peers Note: Inflation and fiscal deficit are IMF estimates for 2012 Source: IMF
The current & evolving economic and financial system is a product of bothdomestic and external factorsSlowdown in India in 2008 was more due to global developmentsCurrent slowdown is combination of global and domestic factorsGlobal developments have considerable direct and indirect influence on oureconomy and financial system through various channels - 7Cs
Using Forex Reserves Raising Interest Rates Make Investments Attractive- Easing Capital Controls
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. Dollar-window For Oil Companies Dollars against oil bonds Sovereign-backed non-resident indian bond Sovereign overseas bond Moral suasion Stagger import payments
Small Industries Development Bank of India (Amendment) Bill, 2012 The NHAI (Amendment) Bill, 2011 The Microfinance Institutions (Development and Regulation) Bill, 2012 Public Procurement Bill, 2012 Prevention of money laundering (amendment) bill, 2011 The Direct Taxes Code Bill, 2010 The Micro financial Sector (Development and Regulation) bill, 2011
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 Eurozone which will determine the future of INR.