Rupee volatility - Managing Finance | Online Mini MBA (Free)
What is the news?Source: http://www.dollars2rupees.com/ChartsFrom average Rs. 44 in July 2011, it is now hovering between Rs. 57 and Rs. 58Indian Rupee has depreciatedmore than 25 per cent since 2011against the USD!Rupee under attack!For example: Rupee versus US Dollar
Why is the “rate” so important? Exchange rate price of a country’s currency in respect to othercountry’s currency Example: USD vs INR, GBP vs INR, Euro vs INR Foreign Exchange market a place to convert currency authorized currency dealers Conversion rate usually the Spot rate Forward rate Inter-bank rate (IBR) for buying and selling
What leads to fluctuations? As simple as Demand and Supply Too much dependency on imports When Foreign investors take away the monies! Grim global economic outlook essentially due to the European debt crisis PIGS! Lack of firm initiative by government on issues such asallowing FDI in retail. Recent debacles have further rendered the Indianmarket unattractive to a certain extent (2G, Coalgate) Weaker Capital markets Upbeat US jobs Speculation that US Federal Reserve may cut back oninvestments into Emerging marketsPortugal, Italy, Greece and Spain
Leads to costlier imports i.e. higher import costs Oil imports, Capital goods, Iron andSteel, Coal, fertilizer, pulses, edible oils Cost of overseas study! Leads to inflationary pressures Increase in import prices of essential commodities arebound to increase the prices of the final goods. This makes it costlier for the consumers and henceinflation might be pushed up further. Higher borrowing costs Foreign currency loans are cheaper due to interestrate differentials But exchange rate fluctuations may negate itWhat is the worry?
Increasing Fiscal Deficit! The difference between total revenue and totalexpenditure of the government. Indication of total borrowings needed by governmentWhat is the bigger worry?Difficult toattract foreigninvestment iffiscal deficitremains high
Increasing Fiscal Deficit! Worsening Current Account Deficit when a countrys total imports of goods andservices is greater than the countrys totalexport of goods and services. Balance of Payments (Imports less Exports)worsens makes a country a net debtor to therest of the world.What is the bigger worry?
Increasing Fiscal Deficit! Worsening Current Account Deficit! Exchange rate risk drives away foreign investors which in turn depreciates the local currency! A key attraction of “higher interest rate” is lost Credit rating agencies also downgrade India’s rating. Sovereign rating of a country determinesinvestment potential into the country Thankfully Fitch recently revised India’s outlook tostable from negative! Impact on Exporters though benefit initially, also feel the pinch due to: adverse effect on inflation sluggish demand from western worldWhat is the bigger worry?
Economic turmoil Slower GDP Hardly at 5% (back to 1991s!) Political turmoil Central Elections next year Do we have a stable party? Lack of leadership SCAMs! nearly add up to $1.8 TrillionAdding fuel to the fire!VVIP Chopper Deal ScamCoalgate!2G SpectrumCommonwealth gamesTelgi Stamp PaperSatyamHarshad MehtaFodderHawalaBofors
Is India’s rupee only fluctuating?This is 2013 comparisonShows South African Rand, Japanese Yen have alsosuffered big time recently
RBI’s role: Using Forex reserves (nearly $300 billion) Easing Control norms can increase the FII limit on investment ingovernment and corporate debt instruments. can invite long term FDI debt funds e.g.infrastructure sector. can enhance the ceiling for External CommercialBorrowings (ECB) to allow more ECB borrowings. Initiate key policy reforms rolling of Goods and Services Tax (GST), Direct TaxCode (DTC) etc. to enable free flow of currency i.e.supply and demand coherenceHow to combat?