Depreciating Indian Rupee
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The document discusses the depreciating Indian rupee and its impact on the Indian economy. It notes that the rupee has weakened by over 9% compared to other developing nations' currencies. A weakening rupee negatively impacts businesses with foreign debt but benefits export-oriented companies. It exacerbates India's trade deficit by increasing costs for major imports like oil and gold. Additionally, lower capital inflows and a decline in foreign government and corporate bond purchases have contributed to the rupee's depreciation. The document outlines the roles of the Reserve Bank of India and the Government of India in regulating the foreign exchange market and implementing measures to stabilize the currency.
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Depreciating Indian Rupee
- 1. Depreciating Indian Rupee : Problems in Indian Economy
- 2. AGENDA TEAM PROBLEM INTRODUCTION DESCRIPTION INR VALUE DETERMINATION AFFECTS ON INDIAN BUSINESS BALANCE OF TRADE ISSUE OIL IMPORTS GOLD IMPORTS LACK OF CAPITAL INFLOWS ROLE OF RBI AND GOVERNMENT
- 3. TEAM
- 4. Team • Ankit Ahuja ankit.ahuja15@sibmpune.edu.in • Ankit Kawad ankit.kawad15@sibmpune.edu.in • Angshuman angshuman.kar15@sibmpune.edu.in • Akumtoshi akumtoshi.poengar@sibmpune.edu.in
- 5. PROBLEM INTRODUCTION DESCRIPTION, INR VALUE DETERMINATION AND EFFECTS ON BUSINESS
- 6. The Weakening Rupee •2nd worst performer in currency market among developing countries. Lost 9.25% since May 2013 •Indonesia(RUPAIYA)and South Africa(RAND) depreciated by 7% and 10 % resp.They compete with India in Agri-products, Engg. goods, electronics and chemicals • Similarly Bangladesh(TACCA) depreciated by 5%, which competes in garment industry. •Thailand(BAHT) that competes in gems and jewellery, there currency have depreciated by 7% .
- 8. Affects of Weakening Rupee on Businesses Companies having foreign debt will be impacted severely as compared to export oriented companies
- 9. BALANCE OF TRADE PROBLEM OIL IMPORTS ISSUE
- 10. Balance of Trade – Imports vs Exports
- 11. Oil Imports
- 12. BALANCE OF TRADE PROBLEM GOLD IMPORTS AND LACK OF CAPITAL INFLOWS
- 13. Gold Imports •950 Tons of estimated imports this year • 10% of Import bill , 75% of Imports as Jewelry •33% of World’s demand •Villainous figure in CAB •Need for innovative financial instruments that can provide real returns
- 14. Lack of Capital Inflows •$3.3 billion of Government & Corporate Bonds Bought vs$6.86b last year
- 15. REGULATOR & ADMINISTRATOR ROLE OF RBI AND GOVERNMENT
- 16. Role of RBI Authorized Body, Forex Licenses Investments by Foreigners & ForeignTravel EXIMTrade RBI is the apex bank that intervenes, supervises, controls the foreign exchange markets in order to create an stable and active exchange market
- 17. Role of Government of India Control measures for Currency Fiscal Monetary Exim Policy
Editor's Notes
- http://www.bloomberg.com/quote/USDINR:CURhttp://www.firstpost.com/economy/at-58-3-against-is-rupee-inching-back-to-record-low-882457.html
- http://www.thehindubusinessline.com/money-wise/how-rupeedollar-rates-are-determined/article4629962.eceIt’s not much different from how the prices of your mangoes are determined, for example. Whether currency movements or prices of mangoes, the most important factor determining their price is the same – market forces of demand and supply.If the demand for dollars increases, the value of dollar will appreciate. As the quotation for Rs/$ is a two way quote (that is, the price of one dollar is quoted in terms of how much rupees it takes to buy one dollar), an appreciation in the value of dollar would automatically mean a depreciation in Indian rupee and vice-versa.For example, if rupee depreciates, a dollar which once cost Rs 47 would cost, say, Rs 50. In essence, the value of dollar has risen and the buying power of rupee has gone down.Besides the primary powers of demand and supply, the rupee-dollar rates are determined by other market forces as well.Market sentimentsDuring turbulent markets, investors usually prefer to park their money in safe havens such as US treasuries, Swiss franc, gold and so on to avoid losses to their portfolios. This flight to safety would lead to foreign investors redeeming their investments from India. This could increase the demand for dollar vis-à-vis Indian rupees.SpeculationThere are derivative instruments and over-the-counter currency instruments through which one can speculate/ hedge the underlying currency rates. When speculators sense improvements/ deterioration of the sentiments of the markets, they too want to benefit from such rising/ falling dollar. They then start buying/selling dollar which would further change the demand/ supply of the dollar.RBI InterventionWhen there is too much volatility in the rupee-dollar rates, the RBI prevents the rates from going out of control to protect the domestic economy. The RBI does this by buying dollars when rupee appreciates too much and by selling dollars when the rupee depreciates significantly.Imports and ExportsEver give thought as to why our government is trying to incentivise exports and reduce imports? There are a lot of schemes and incentives for exporters while importers are burdened with many conditions and taxes. This is to protect our economy from high rupee depreciation. Importing foreign goods requires us to make payment in dollars thus strengthening the dollar’s demand. Exports do the exact reverse.Public Debt / Fiscal policyWhenever our Government fails to match expenses with equivalent revenue, there is a shortage of funds. To finance this, the Government at times opts to borrow money from institutions such as the World Bank and the IMF. This debt, accrued interests, and the payments made, also lead to currency fluctuations.Interest RatesThe prevailing interest rates on the government bonds attract foreign capital to India. If the rates are high enough to cover the foreign market risk and if the foreign investor is comfortable with the fundamentals or credit ratings, money would start pouring into India and thus provide us with a supply of dollars.
- It industries like tcs ,wipro, infosys will have improved bottomlineIn auto sector the impact will be mixed as bajaj auto which have 30% export revenue and near zero debt will benefit but tata motors that have leveraged huge amount of foreign capitals will have negative impact.Similarly for m&m and marutisuzuki there will not be much impact.Banking sector will not be impacted much. There may be a loss in forex but the major borrowing is long term and not market to market.In fmcg sector , hul is going to be hit most as it import majority of its raw material while the impact for itc will infact be positive as it procure locally.Depreciation of rupee for pharma is positive since they export(cipla about 50 % and sun pharma about 75 % ).The list can go on and on but what is the crush of this discussion is that all those costht have foreign debt will be impacted severely.Tourism sector is going to get a boost in terms of both topline and bottomline.
- http://www.guardian.co.uk/news/datablog/2013/feb/22/cameron-india-trade-exports-imports-partners#_Feb 2013http://www.infodriveindia.com/export-import/trade-statistics/top-products.aspx
- http://www.livemint.com/Money/BxHnzfGfUk5dNHzfHmqXlN/India-still-heavily-dependent-on-oil-imports.htmlAlthough India’s oil production recovered in March, output for the fiscal year shows a decline. Moreover, oil demand in 2012-13 increased by 4.7%, among the highest historically. The country continues to be heavily dependent on imports, a measure that increased last fiscal year. Barclays expects net imports to fall by one percentage point by March 2017, with a rise in domestic output atCairn India Ltd, Oil and Natural Gas Corp. Ltd and Oil India Ltd.http://pib.nic.in/newsite/erelease.aspx?relid=86628
- http://timesofindia.indiatimes.com/business/india-business/Growth-in-demand-for-gold-in-India-higher-than-China/articleshow/20099266.cmsAccording to the WGC, gold import in India is likely to be in the higher range of 865-965 tonnes this year as against an import of 860 tonnes in 2012. Despite an increase in consumption demand, gold imports reported a 6% decline in Q1 2013. While globally, demand for both jewellery and bars and coins reflected an increase, ETFs reported a net outflow of 177 tonnes during the quarter.Indias_Gold_Rush_Its_Impact_and_Sustainability – AssochamAs per a Gold Council Report4 focIndian Gold consumption indicates that Gold jewellery accounted for around 75 per cent of total Indian gold demand in 2009, the remainder being investment (23 per cent) and decorative and industrial use (2 per cent). using on$-130467 Million vs -96951Million
- FDIPortfolioOtherReserveCapital Accounthttp://articles.economictimes.indiatimes.com/2013-06-17/news/40027509_1_jet-etihad-fipb-more-controlhttp://www.business-standard.com/article/economy-policy/fdi-inflows-into-india-contract-38-in-2012-13-113052701103_1.htmlIn big ticket single brand retail, the Cabinet Committee on Economic Affairs had recently approved Swedish furniture maker, IKEA's proposal, which will bring in $1.9 billion over the next 10-15 years.Its first store would take a couple of years to come up.Another Swedish firm, HNM, also proposed to come in the single brand retail space with an investment flow of $129 million.The proposal is yet to be taken up by the Foreign Investment and Promotion Board.After FDI reforms, the Jet-Etihad deal was also struck with a promised FDI inflow of $370 million. However, the inflows will take time to come.http://www.bloomberg.com/news/2013-04-30/india-to-cut-tax-on-rupee-bonds-to-attract-foreign-investment.htmlIndian debt returned 5.75 percent in 2013, compared with 2.9 percent on Chinese notes and 2.53 percent on Russian bonds, according to indexes compiled by JPMorgan Chase & Co. Brazilian securities lost 1.52 percent, the data show.Overseas investors bought $3.3 billion of government and corporate debt so far in 2013, compared with $6.86 billion last year, according to data compiled by Bloomberg. Indian companies sold 792 billion rupees ($14.7 billion) of bonds in 2013, about 5 percent more than in the same period of 2012, the data show.
- Q. 1: Explain the various exchange rate systems.Ans. A) INTRODUCTION The earliest exchange rate system was popularly known as Gold standard, this system existed during 1879-1934. In this exchange rate system the value of currencies of different countries was fixed in terms of gold. Hence under gold standard exchange rate system there could be only fixed exchange rates. After the end of World War II to 1971, another Fixed Exchange Rate System known as Bretton Woods System prevailed. After 1971, the exchange rate system was not purely flexible, hence it was called Managed Float System.B) EXCHANGE RATE SYSTEMS Fixed Exchange Rates IMF was established with the object of stabilising the rates of exchange between the member countries. Under its charter, every member country was required to fix and declare the par value of its currency in terms of gold or dollar and maintain it. The system of fixed exchange is known as pegged exchange rates. The Government determines the exchange rate by pegging operations (i.e. buying and selling foreign exchange at particular exchange rate). In pegging operation, Government fixes an official exchange rate and enforce it through Central Bank. A exchange stabilisation fund may be set up in order to maintain the exchange rate by buying its currency when market exchange rate falls below specified exchange rate and vice versa. The major defect in this system was that if the market exchange rate falls consistently pegging operations will be very expensive as it will lead to heavy reduction in reserves. Under gold standard, rate of exchange varied within a small range of gold export point and gold import point. But gold standard was given up by all countries in 19'30s. Since the fixed exchange rates do not reflect true value of currencies, flexible exchange rates were adopted by countries. Flexible Exchange Rate Flexible exchange rates are determined by forces of demand and supply in the foreign exchange market without the interference of Government. The relative positions of demand and supply depends on the deficit or surplus in the balance of payments of the country. The exchange rates are not rigidly fixed up but allowed to float with changing conditions. The relative value of currencies alter far more rapidly with automatic devaluation or revaluation. The free floating rate is allowed to seek its own level as no par of exchange is fixed. Since 1980s as many countries were in favour of the flexible exchange rates IMF was forced to adopt flexible exchange rates. Managed Exchange Rate System I Managed Flexibility :- A system of managed flexibility came up to take the merits of fixed and flexible exchange rate and to overcome their demerits. This system is based on the par value concept under IMF guidelines. In managed flexibility of exchange rate system, the range of flexibility around fixed par values is determined by the country as per its economic need and the prevailing trend in international monetary system. This system of exchange rate requires the country to interfere in foreign exchange market from time to time in view of the emerging disequilibrium. The Central Bank of the country holds large amount of foreign exchange. Hence the Central Bank can control the exchange rate by manipulating the magnitude of demand or supply in the forex market. For instance, the Central Bank resorts to large scale buying of foreign currency when there is an excess supply of foreign currency and vice versa.Q. 2 : Explain RBI’s intervention in exchange rate management in India. (M.2011) OR“RBI is the apex body that intervenes and control foreign exchange in India”. Discuss. ORHow does RBI intervene in the foreign exchange market.Ans. A) RBI’s INTERVENTION AND EXCHANGE RATE MANAGEMENT :- In 1939, the Exchange Control Department of RBI was set up. In order to conserve the scarce foreign exchange reserves, the Foreign Exchange Regulation Act (FERA) was passed in 1947. India adopted fixed exchange rate of IMF upto 1971, whereby the Indian Rupee external par value was fixed. In 1973, FERA was amended and it came in force on January 1st, 1974. It gave wide powers to RBI to administer exchange control mechanism properly. In 1992, RBI introduced LERMS (Liberalised Exchange Rate Management System) Under LERMS a dual exchange rate was fixed. The 1993-94 Budget made Indian Rupee fully convertible on trade account. LERMS was withdrawn. Developing countries allowed market forces to determine the exchange rate. Under flexible exchange rate system, if demand for foreign currency is more than that of its supply, foreign currency appreciates and domestic currency depreciates and vice versa. To minimise the disadvantages of flexible exchange rate, most of the developing countries including India have adopted the concept of managed Flexible Exchange Rate (MFER). Under MFER, the Central bank intervenes to bring stability in exchange rate. RBI’s intervention involves purchase of foreign currency from market or release (sale) of foreign currency in the market, to bring stability in exchange rates.ROLE OF RBI IN FOREIGN EXCHANGE MARKETThe role of RBI in the foreign exchange market is revealed by the provisions of FERA (1973). Administrative Authority The RBI is the administrative authority for exchange control in India. The RBI has been given powers to issue licences to those who are involved in foreign exchange transactions. Authorised DealersThe RBI has appointed a number of authorised dealers. They are permitted to carry out ail transactions involving foreign exchange. The above provision is laid down in Section 3 of FERA. Issue Of DirectionsThe 'Exchange Control Manual' contains all directions and procedures given by RBI to authorised dealers from time to time. Fixation Of Exchange Rates :-The RBI has the responsibility of fixing the exchange value of home currency in terms of other currencies. This rate is known as official rate of exchange. All authorised dealers and money lenders are required to follow this rate strictly in all their foreign exchange transactions. Foreign Investments :-Non-residents can make investments in India only after obtaining the necessary permission from Central Government or RBI. Great investment opportunities are provided to non-resident Indians. Foreign Travel :- Indian residents can get foreign exchange released from RBI upto a specified amount for travelling abroad through proper application. Import Trade The RBI regulates import trade. Imports are permitted only against proper licenses. The items of imports that can be imported freely are specified under Open General Licence. Export Trade The RBI controls export trade. Export of gold and jewellery are allowed only with special permission from RBI. Gold. Silver. Currency Notes Etc. In recent years, the limits fixed for bringing gold, silver, currency notes etc. has been relaxed considerably. Submission Of Returns All foreign exchange transactions made by authorised dealers must be reported to RBI. This enables the RBI to have a close watch on foreign exchange dealings in India. Thus, from above points we can say that RBI is the apex bank that intervens, supervises, controls the foreign exchange markets in order to create an stable and active exchange market.Q. 3 : Explain the exchange controls administered by RBI under FERA. OR“FERA act was administered by RBI to conserve exchange reserves.” Explain. ORWrite note on FERA I FEMA.Ans. A) FERA AND EXCHANGE CONTROLS :- In 1939, under the Defence of India Rules (DIR), the Exchange Control was imposed. In 1973, FERA was amended. India has accepted a system of multilateral payments, i.e., the rupee should be freely convertible to currencies of all member countries of IMF. But the RBI adopted exchange controls under FERA, in order to conserve India's Foreign exchange reserves. Foreign exchange was rationed out strictly according to availability. Purchase and Sale of foreign securities by Indians were strictly controlled. All external payments had to be made through authorised dealers controlled by RBI. Exporters who acquired foreign exchange had to surrender their earnings to authoriseddeale rs and get rupees in exchange. Imports were rigidly controlled and imports of unnecessary items were prohibited. The RBI as the apex bank supervised and controlled the foreign exchange market. The RBI decided the exchange rate of rupee in terms of pound sterling on a day to day basis. It would sell pound sterling against specific demand and would also buy US dollar, pound sterling, German mark and Japanese yen. In 1992, the Pound sterling was replaced by dollar as intervention currency. Hence, RBI would sell only dollar and continue to buy Dollar, Pound, Mark and Yen. In New Industrial Policy of 1991, the government announced major concessions to FERA companies. FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) The relaxation of FERA encouraged the inflow of foreign capital and the growth of Multi National Corporations (MNC's) in India. FERA was replaced by FEMA in 1999. Under FERA RBI's permission was necessary. Under FEMA, except for Section 3 (relates to foreign exchange) no other permission is required from RBI. The purpose of FEMA is to facilitate external trade and payments and promote orderly development and maintenance of foreign exchange market in India. FEMA has simplified the provisions of FERA. The two key aspects of FEMA are the relaxation of foreign exchange controls and move towards capital account convertibility. To facilitate foreign trade restrictions drawals of foreign exchange for current and capital account transactions have been removed. FEMA regulates both import and export trade methods of payment. If any person contravens any provisions of FEMA, he shall be liable to a penalty upto twice the sum involved in such contravention. There would be no punishment by way of imprisonment.Q. 4: Distinguish between FERA and FEMA.Ans. A. FERA V/S. FEMAFERAFEMA1. FERA means Foreign Exchange Regulation Act.2. RBI’s permission was necessary in respect of most of the regulations.3. Any person who contravenes FERA is subject to penalty and imprisonment.4. All transactions with Non-residents were prohibited.FEMA means Foreign ExchangeManagement Act.RBI’s permission is necessary only forSection 3.Any person who contravenes is liable topenalty but not imprisonment.Dealings with Non-residents have been substantially diluted.