Rupee Depreciation

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Causes and impact of depreciation of Rupee value

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  • The causes:

    1. The burgeoning current account deficit and fiscal deficit. This basically means that the Government of India is ending up with more expenditure than receipts in its books. And this receipt-expenditure mismatch is ultimately financed by printing of more and more currency notes, thereby impacting the value of the Indian rupee vis-a-vis other currencies of the world.
    2. The uncontrolled and run-away inflation. This is essence means that the purchasing power or the value of the Indian rupee is fast depreciating in comparison with other currencies of the world.
    3. Large capital outflows, which means that our imports are more than our exports, which means that there is net outflow of foreign exchange, which reduces our ability to protect our currency.

    The impacts:

    1. High inflation, as the vicious trap would reinforce itself.In other words, high and continued inflation is both a cause and a result of rupee depreciation, which may ultimately result in a change of currency.
    2. Foreign portfolio investors will get trapped with their investments. No fresh FDI and FII investments would follow,and the country and its currency could be ranked as 'non-investment grade,' which would have long-term ramifications.
    3. Local growth would also be hampered due to the economic instability. All this is part of the 'vicious-trap,' from where finding an exit-route is very difficult.

    The 'possible' solutions:

    1. Check the current account deficit and spend from your income and not from borrowings. Raise income, reduce spending,and do not print currency notes for bridging the income-expenditure gap.
    2. Do not let inflation go out of hand. In a rapidly-growing economy as the purchasing-power of the people rise, there has to be some inflation which is both a consequence as well as an incentive for fueling growth. Hence, there needs to be a delicate balance between growth and inflation in such a manner that one reinforces the other.
    3. Faced with no other choice, raise interest rates across the board, so that cheap funds is totally withdrawn from the system. But that will kill growth.
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  • Due to this demand of dollar is rising and rupee is depreciating
  • Rupee Depreciation

    1. 1. Presented ByThe Nutcrackers Nihar Routray Manjesh Bharati Shankar Narayan Chinmay Sharma
    2. 2. Recession in developed economies like USmade big institutions to pull out their moneyfrom India
    3. 3. Default concerns of European nations hasresulted in loss of confidence in the Euro andappreciation of dollar
    4. 4. The fear of bubble bursting in gold hasresulted in investors viewing dollar as a safecurrency
    5. 5. • Trade deficit has widened by 40,000 crores in the last quarter. This has resulted in increased imports and spike in dollar demand
    6. 6. Expecting current account deficit tosettle at 3.0-3.1% of GDP by Mar 2012
    7. 7. Q> In 2008, we saw a drastic Rupee Devaluationagainst the USD. Is the current scenario similar?A> No. Last time around, the devaluation wasdriven mainly by rise in oil prices. The price of oilreached USD 147 per barrel and was one of thekey contributing factors. However, risk aversionwas also a part which affected the value of theIndian Rupee.
    8. 8. Q> Has the Risk Aversion among the InvestorPublic changed when we compare the times in2008 to now?A> The concept of risk aversion is the same.But, the current situation is much more riskier.Back then, the problem was due to debtproblems in US. Right now, the problem is moreprofound and markets world-over are in a crisis.So, people are much more risk averse than whatthey were in 2008.
    9. 9. Q> If investors take out their investment fromEuropean countries to invest in US, would it haveany effect on the exchange rate of rupee?A> Not much. Only the US Dollar investmentsmade in India will affect the exchange valuebetween US Dollar and Indian Rupee. US Dollarinvestment in Europe will not affect theexchange rate in India.
    10. 10. Q> What can the RBI do?A> Raise policy ratesA> Use FOREX reservesA> Ease capital controlsA> Administrative measures

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