1. “THE EFFECT OF RUPEE DEPRECIATION ON INDIAN ECONOMY”
Submit ted to
MUMBAI UNIVERSITY
FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF
Mas te rs of Comme rce
ECONOMICS
SESSION 2013-2014
DEPT. OF MANAGEMENT STUDIES
MULUND COLLEGE OF COMMERCE
Under the guidance of: MR. PAWAR
Submit ted by: RAVEENA UDASI
Roll: - 15051
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2. DECLARATION
I, Rave ena Udas i, student of MCom here by declared that the research
report entit led “SUCCESS AN D FAILUR ES OF EUROPEAN UN ION ” is
comple ted and submit ted under the guidance of is my origina l work.
The imper ia l finding in this report is based on the data collec ted by me. I have
not submit ted this project report to any other Univer s it y for the purpose of
compliance of any requirement of any examina t ion or degree.
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DATE: Rave ena Udas i
M.Com Sem I
ROLL NO. 15051

3. CERTIFICATE
I, Prof. Pawar, hereby certify that Miss Raveena Manoj Udasi ROLL. No 15051 of Mulund
College of Commerce, S. N. Road, Mulund (West), Mumbai -400080 of M.com Part I (Business
Management) has completed her project on “The effect of Rupee depreciation on Indian
Economy” during the academic year 2013-14. The information submitted is true and original to
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the best of my knowledge.
____________________ ___________________
Project Guide Principal
_____________________ ___________________
Co-coordinator External guide
Date:

4. ACKNOWLEDGEMENTS
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A research project is a golde n
opportuni t y for learning and self development . I conside r myse lf very lucky and
honored to have so many wonder ful people lead me through in comple t ion of
this project.
My grate ful thanks to Mr. Pawar
who in spite of being extraordina r i ly busy with her/his duties , took time out to
hear, guide and keep me on the correct path. I do not know where I would have
been witho ut her/him. A humb le ‘Thank you’ Sir.
I would also like to thank everyone who took active involvement in helping me
with my project report without whom, it would not have been possibl e.
RAVEENA UDASI

5. EXECUTIVE SUMMARY
Deprecia t ion refers to a fall in the value of the domest ic currency which is
caused by the demand for foreign currency exceeding its supply in the market.
In such a situat ion one has to pay more than before to get units of foreign
currenc y. This fall takes place in the market and on its own. Market determined
exchange rate serves the purpose of aligning the domest ic economy with the
world economy was the price route. As consequence s the domest ic price gets
linked up with those of the world price. With the libera l izat ions and
globa lizat ion of the economy in recent years, impor ts are bound to increase. The
lessening of restrict ions on imports and lower ing of tariff on impor ts which the
economic reform implie s, an increa se in impor ts has in fact taken place. Again
with trade having become an impor tant element of the new strategy of growt h.
India being a developing economy with high inflat ion, depreciat ion of the
currency is quite natura l. Depreciat ion of rupee is good, so long as it is not
volat ile. A random depreciat ion that we have seen in the last few months is bad
and it has hurt the economy. Right from the beginning of year 2013, the value of
rupee has been deprecia t ing.
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6. TABLE OF CONTENT
SR. NO. TABLE OF CONTENTS
PG. NO.
1 INTRODUCTION 8
2 IMPACT OF RUPEE DEPRECIATION 14
3 ROLE OF RBI 16
4 NEGATIVE FEEDBACK MECHANISM 20
5 IMPOSSIBLE TRINITY 22
6 CAUSES OF THE DEPRECIATION 23
7 BAD NEWS / GOOD NEWS 25
8 ROLE OF THE GOVERNMENT 26
9 CONCLUSIONS 30
10 RESEARCH DATA TABULATION & ANALYSIS 40
11 FINDINGS AND RECOMMENDATIONS 41
12 BIBLIOGRAPHY 42
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7. LIMITATION OF RESEARCH
Of all the living things in this world, Huma n Beings are the most unpredic table
and somet ime s may act in a most irrat ional manner. Hence the research should
not be conside red to have a univer sa l applic at ion since a conside rable degree of
behaviora l aspect is involved in making investment decisions.
The research is also a bit narrow in scope as it consider s only the success and
failure s of Europea n Nation. It did not take into account a very important factor
whic h is traveling to the Europea n countr ies for data evalua t ion and findings but
limi ts to the data provided in the books and compute rs. However, the detailed
study with the same approach can be performed.
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8. INTRODUCTION
RUPEE DEPRECIATION
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9. “We invented money and we use it, yet we cannot understand its laws or control
its actions. It has a life of its own.”
- Lionel Trill ing, Amer ic an lite ra ry critic.
The most concerning chapter for India during last two years and specifica l ly last
two months is the weakening of rupee agains t dollar . It is not only that rupee
has lost its value in the globa l context but also dolla r has improved its
performanc e in the globa l trading markets. The outstanding performance of US
equit ies and the improvement in the labor market has made America ns more
optimis t ic about the US economy, thereby stimula t ing greater hopes of
QE(Quanti ta t ive Easing) tapering.
The government of India is still unable to generate heavy capita l inflows. I f US
Federal Reserve withdraws its bond buying programme; there will be unexpec ted
outward flow of money leaving India clambe r ing for dolla rs . The slowdown in
the India n economy has made the situat ion more fickle.
The government has a strong role in controll ing currency in the form of policy
regula t ion and reforms. The current UPA leadership has failed to strike with
some heavy reform to generate more cash inflows . As a result the government
has gradually lost its control over rupee deprecia t io n. I nves to r s’ sentiment plays
a pivota l role over here.
Oil and gold impor ts account for 35 per cent and 11 per cent of India ’s trade bill
respective ly.There has been an uninter rupted demand for the dollar from the oil
impor te rs pushing the rupee lower. Likewise the falling gold prices have made
the centra l bank to reduce impor ts, which incre ases CAD and hits the currency
direct ly. Indian economy require s a strong structura l reform to mainta in a
posit ive balance of payment.
Also, government spends excess ive ly as elect ion approaches just to woo
electora te votes. Thisc ause s the rupee to depreciate. Then the government beats
around the bush to control the currency behaviour. Most of the time s these
measures worsen the economic crisis to a great extent.
The foreign inst itut iona l inves tors have been selling index future s and Indian
equity market is weakening. As a result there is a heavy demand for dollar and
Indian currency as well as economic situat ion is looking too gloomy.
These worrie s, combined with a record high current account defic it and now
uncerta inty over the centra l bank’s moneta ry policy stance, have prompted
foreign inves tor s to sell more than $12 billion of Indian debt and equit ie s since
late May.
Reserve Bank of India has taken certain steps and some more to be followed to
have a control over rupee.
But the big question comes here.
what are the implic a t ions?
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10. The best busines s prototype anyone can have is to spend in rupees and earn in
dollar s, which is what the giants of India Inc, including the top IT companies,
excel in. Basica lly the sector which is target ing exports for its indust r ia l
operations are the one wins the game.
Dolla r apprecia t ion would be positive for sectors such as IT, pharma ceut ica ls ,
hotel, textiles and automobi le s which have the total foreign exchange earnings
of these firms are far greater than their forex spends. As much as the rupee
weakens, the foreign exchange earners gain provided the other factors rema ins
constant.
A sharply declining rupee trigge rs infla t ion, broaden the current account defic it,
hits inves tor sentiment and creates burdens for organizat ion with high exposure
to foreign debt. The government and the Reserve Bank of India have taken
severa l reform init ia t ive s to resist the downturn, but their success stories are
looking gloomy.
Buying impor ted mater ia ls will become very costly. A weak rupee will create
extra stress on Oil Marketing Companie s (OMC) and this will surely be passed
on to the consumer s as the companie s are allowed to do so after the deregula t ion
of petrol and partia l deregula t ion of diesel. If the OMCs increase fuel prices,
there will be a substant ia l increa se in overall cost of transpor ta t ion which will
trigger infla t ion.
If the depreciat ion is steep and without control, it will strike up infla t ion. As a
result the Central bank would have very less room to impose further rate cut and
that’s the burden the borrower would have to bear.
India ns who have gone to abroad for tours or studie s are highly affec ted in these
times . The only smiling people in this context are the N RI’s who gain more on
sending money to their home land.
As a whole we can say that though weakening rupee is the reason for someone ’s
smile it is a real threat for the countr y’ s overall fisca l health and increa se the
current account defic i t heavily. But in my opinion this huge downgrade is a
temporary phenomenon and the rupee is really oversold. Now the Central bank
and Government should work hand in hand and find out the policy measure s to
stabilize the frightening scenario. I personally hope a further cut in SLR to ease
the liquidi ty to save rupee and also import duty hike in gold and other related
mater ia ls. RBI can buy bonds to ease liquidity in the market. Finally we can say
that the situat ion is tight and challenging for us, but we can not only hope for
the best but also should contribute the most to get back Indian economy in the
driving seat.
With the rupee shedding over 10 per cent in value since the last week of July,
there is a lot of attention on the volat i le nature of the Indian Currency vis-a-vis
the US dolla r. But, the current free fall in the domest ic currency to Rs 49-50
levels is in a way mirror ing a histor ica l trend. Two major rupee devalua t ions
occurred in 1966 and the early 90s. The reasons for the two devaluat ions were
not too dissimi la r ; twin defic i t (current account and fisca l ), soaring infla t ion,
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11. insuf fic ient foreign exchange reserves, and the developed world demanding
decontrol and libera liza t ion to allow them to do busines s in India.
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The reason for the fall
The Indian rupee is under great stress as overseas inves tors are paring their
exposure to Asia’s third- la rges t economy amid the US and Euro-zone crisis and
mount ing worrie s over the domest ic economy. The globa l uncerta inty and
various economy crisis has forced the investor s, large banks, investor s and fi-nancia
l inst itut ions to search for safe haven and they have now started selling
Euros and buying dollar s. Thus, the dollar has apprecia ted against all major
currencies including rupee. These inves tors are quickly pulling out the money
from Indian market and invest ing in other safe investments such as Gold or the
US dolla r.
The 3 major factors contr ibut ing to the fall are:
1. Risk Avers ion on part of Currency Investor s, which has caused the Demand
for the US Dollar to go up world over.
2. Uncerta in Economic Situat ion around the globe
3. FII’s turning Net-Selle` rs and withdrawing funds from the India n Market.
Comparisons with a wider basket of 36 currenc ie s also indica te that the rupee
has indeed appreciated by almos t 15 per cent in real terms. Hence, purely from
an analyt ic a l perspect ive, the deprecia t ion in the rupee is an overdue market
adjustment, result ing from the nexus between exchange rate, infla t ion and
intere s t rates in the economy.
Impact of Rupee Deprecia t ion on the Indian Economy
Infla t ion graph and Fisca l defic it to scale up

12. Currently, India is suffe r ing from a near two digit infla t iona ry pressure . A
deprecia t ing rupee would only add fuel to this. It would lead to high infla t ion,
as India impor ts around 70 per cent of its crude oil requirement and the
government would have to pay more for it in rupee terms. Due to the control on
oil prices, the government may not easily pass the increased prices to the
consume rs . Further, this higher impor t bill will lead to rise in fisca l defic it for
the government and will push the infla t ion.
On November 21 alone, overseas funds sold more than US$500 mill ion worth of
Indian- listed shares over the five trading sessions, reducing net inflows for 2011
to under US$300 mill ion. The rupee has lost more than 10 percent of its value
this year, making it one of the worst performing currencie s in Asia. In the light
of uncerta inty and fall in globa l stock market, FII’s are supposed to be pulling
out their money from various EME’s (Emerging Market Economies ) and taking
them back to their home countr ies in order to susta in themse lves.
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A blow to India n Importer s
The Indian impor t indus try would also have to pay more in rupee terms for
procuring their raw mater ia ls. This would happen despite a drop in globa l
commodi ty prices, only because of a depreciat ing rupee against dollar.
Corporate India is a net borrower of dollar s and to that extent a depreciat ing
rupee would impact its balance sheet adverse ly. Companies with foreign debt on
their books would also be impac ted. With the rupee deprecia t ing against the
dollar , these companies would need more rupees to repay their loans in dollar s.
This will increase their debt burden and lower their profits. Obviously, inves tor s
would do better to stay away from companies with high foreign debt.
The deprecia t ing rupee has pushed up the prices of electronic gadgets and home
appliance s. Car makers who impor t 10 to 40 percent of the components are
contemplat ing increa s ing prices. This is an attempt to offset the increa sed
impor t costs owing to the deprecia t ing rupee. An increa se in prices could span
from Rs 10,000 for small cars to Rs 50,000 for luxury vehic les . The
rising intere s t rates and fuel hikes have played spoilsport for the car indus try
that is brimming with a wide array of choice for consumer s.

13. IMPACT OF RUPEE DEPRECIATION
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14. Negative impact on Indian students and traveller s abroad
Individual ly, travell ing abroad becomes more expensive as travel cost could go
up by around 10 per cent compared to last July figure s. Students studying
abroad too will be hit as more rupees will go out to pay for the courses, stay and
other expenses .
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Impact on Oil Imports
Oil imports consume the larges t part of the FOREX reserves. A deprecia t ing
rupee is bound to offset the decrease in the internat ional prices of commodi t ie s
such as oil. As can be seen from the figure below although the oil price per
barrel has fallen however the depreciat ing rupee has not given any respite to the
impor te r as they actually have to shell out more money in order to purchase the
same quantity of oil. Take for instance crude oil impor ts. Brent crude oil price
was $118.46 per barrel on April 2011 when exchange rate for the rupee was Rs
44.4 to a dollar . On Novembe r, oil price had gone down to $109.03 per barrel
and exchange rate was Rs 52.7 to a dollar. Thus, because of the rupee
deprecia t ion not much benefit can be derived out of the lower oil price. Instead,
the increa se in price of impor t ing oil between April and November is to the tune
of Rs. 489.8 per barrel.

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Cheerful news for Exporter s
When a currency depreciates , the exporters make more profit because they get
more of the local currency for every unit of foreign currency though the quantity
of trade remains unchanged. The deprecia t ing rupee would be posit ive for the
Indian IT sector which generates more than 85 per cent of their $70 billion
revenue from the overseas markets. This kind of apprecia t ion in foreign
currency will enhance their actual realisat ion of revenue in dolla r terms.
Role of RBI
RBI will inter fere in this area because a steady value of rupee is essentia l for
the orderly growth of the economy. A depreciat ing rupee will harm
oilma rket ing companie s, and other import oriented busines se s. This may help
the software companies and other exporter s, who get their payment in dollar s.
RBI will be watching the posit ion and inter fe re to stabilize the currency value.
In case of deprecia t ion, RBI will sell foreign currency from the reserve and this
will help in arrest ing the fall of rupee to some extent.
Possible Solutions
 Oil import demand could be staggered and purchases co-ordinated so that at no
point there is undue bundling of impor ts .
 The government can take init ia t ives which encourage and increa se the flow of
foreign inves tments into India. Three recent steps taken by the government be it
the pension fund FDI limit or the increa se in the inves tment limi t inves tor s in
government security and corporate bonds are the steps in the right direct ion.
 The government can make investments attract ive and invites long term FDI debt
funds in infras t ructure sector.
 Government can conside r tempora ry import compress ion.
 FDI in the aviat ion indust ry retail can also attract foreign inves tors.
Exchange Rate Me chanism
Let us first try to unders tand how exchange rate is determined? All economies
that intera ct with internat iona l economy can be broadly class ified into three
categor ies on the basis of exchange rate policy of the countr y.
1. Fixed Exchange Rate: These economies peg the value of their currency with
some other prominent currenc y like US dollar. This system is simple and

16. provide s stability to the economy (of course, if the economy of the country to
whose currency its currenc y is pegged is stable) . This type of exchange rate
regime is mainta ined by genera l ly smalle r economies like Nepal and Bhuta n
(pegged to India n Rupee) or several Afric a n nations. Rationa l behind such
regime is that in case of small economy – if the exchange rate
ismarke t determined – the sudden influx or outflux of even relat ive l y small
amount offore ign capita l will have large impac t on exchange rate and cause
instabi l ity to its economy. Notable except ion is China whic h despite being large
economy has its currenc y pegged to US dollar . But then when it comes to China,
its irrat iona l to talk about rational i ty .
2. Floating (or free) Exchange Rate: Bigger and developed economies like US,
UK, Japan etc genera ll y let market determine their exchange rate. In such
economy exchange rate is determined by demand and supply of the currency.
For example consider exchange rate of US dollar versus Japanese Yen. If US
wants to import certain item from Japan, it will have to pay the Japanese
company in Japanese yen. This is because in common market of Japan, dolla r
will not fetch you anything. But the Amer ic a n company will not have Yen, so it
will purchase Yen from the interna t iona l currency market. This will increase the
demand of Yen and supply of dolla r. Thus the value of Yen vis a vis dollar will
increa se. Similar l y if Japanese company is impor t ing something from US, it will
increa se value of dolla r as compared to Yen.
Export- impor t, though the major, is not the only source for currency exchange.
Capita l flow – Americans inves t ing in Japan and Japanese inves t ing in USA – is
also a signi f icant source of currenc y exchange. Another source of currency
exchange is remittance – that is the money sent home by Americans working in
Japan and vice versa. Cumula t ive of all these exchanges determine the exchange
rate. If net requirement of Dolla r by Japanese is more than net Yen required by
USA, dollar will apprecia te against Yen. You should also unders tand that this is
oversimpl i fied for the purpose of illus t ra t ion. In real world, there will be
mult ilate ra l interac t ions and final exchange rate will be equilibr ium reached by
all those interac t ions.
3. Hybrid system: Most mid sized economy like India practice s a mix of both
these regime s. It allows for the exchange rate to float in a range whic h it deems
comfor table. Once the market determined rate tries to breach this range, centra l
bank (government ) intervenes in the currency market and controls the exchange
rate.
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17. How doe s gove rnme nt control exchange rate?
In fixed or hybrid exchange rate regime where government controls exchange
rate, control is exercised by active ly partic ipa t ing in interna t iona l currency
market through its centra l bank (Reserve Bank of India or RBI in our case).
Suppose there is huge demand of rupee in India which is driving the value of
rupee. Also, lets assume that RBI is comfor table only in range of Rs 50 to Rs.
60 per US dolla r. This rapid surge in the demand of rupee (which might be
because a. India n export is far more than its impor t, b. foreign investor s want to
inves t in India and c. large number of Indians earning abroad are remit t ing their
money back home) is pushing the exchange rate below Rs. 50 per dollar. The
RBI will then step in the market and will offer Rs. 50 for each dollar. Those
buying rupees agains t dollar will now purchase from RBI since its offer ing
better rate. Soon other traders will have to arrive at this rate, if they want to
partic ipa te . Since RBI has the abilit y to print currenc y notes, it can keep the
lower limit of exchange rate fixed at this value. When demand for rupee is
subsided, RBI will step back and let market determine the exchange rate. In the
process, RBI will have accumulated a pool of dollar s; this is called forex
reserve or foreign exchange reserve.
Now let us move to other extreme. Suppose India n exports have dwindled,
impor ts are on surge, foreign inves tors are flee ing Indian market and
remit tances are at all time low. Now, every one wants dollar but there is litt le
supply. This will drive the price of dolla r up. Its about to breach the upper limi t
of Rs. 60/ USD. RBI will step in again and will put its dollar reserves on sale at
the rate of Rs. 60/ USD. This will stop the further depreciat ion of rupee.
As you can see, in order to be able to stop the currency from apprecia t ing, RBI
will have to print money and for prevent ing its depreciat ion it needs a reserve of
dollar . This constra int has intere st ing implic at ions on the current predicament of
RBI in the context of depreciat ing rupee.
Effec t of exchange rate on Import and Export : Suppose US company wants to
buy India n textile and suppose on T-Shir t costs Rs. 120 and exchange rate is Rs.
50/$. So for american company the cost of T-Shir t is $2.4. Now, if rupee
deprecia te s to Rs. 60/$ the price of T- shir t becomes $2 only. This will make
India n T- shir t cheaper to buy and will increase its demand. Companie s who were
impor t ing from other nations (may be China or Banglade sh) might shift to India
and India n exports will increa se.
Consider the opposite scenar io. Rupee appreciates to Rs. 40/$ making the cost
of one T- shir t $3. This will repel US importer s and might drive them to other
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18. rival exporter s whose garments are cheaper. Thus, depreciat ing currency helps
exports while apprecia t ing currency has opposite effect .
Similar ly if India imports $ 1000 iPad from US, at exchange rate of Rs. 60, it
will cost Rs. 60000. If currenc y apprecia te s to Rs. 50/$ the price will reduce by
Rs. 10000. This might encourage many new people to by iPad whic h earlier
thought it to be too expensive. Thus, the demand for impor ted products will
increa se in apprecia t ing currenc y and will drive impor ts upward. Deprecia t ing
currency will have opposite effect.
Balance of Payment (BoP) Accounts
Internat ional monetary transact ions of a nation is recorded in two accounts .
1. Current Account: This records all the trades (export- impor t ), remittance s,
intere s ts and earnings on inves tments made into out side countr ie s and other
flows which is current in nature (meaning with no intent ion of future return). If
total inflows in the countr y (its export, remit tanc es and earning from its
inves tments abroad) is more than its outflows (its impor t, remit tance s out of the
country, payme nts of intere sts etc.) then the country is said to have current
account surplus. China, owing to its huge expor ts, is currently the nation with
larges t current account surplus. Simila r ly, if outflows exceeds inflows, the
countr y is said to be in current account defic it . USA has the larges t current
account defic i t. India too has huge current account defic it (about 1 20 billion
USD in FY 2012)
2. Capita l Account: This records all the flow (into or out of the country) made
for future return – inves tment in stocks, bond or companies , in real estate or
FDI (inves tment made for setting up of busines s or indus try) . It also includes
loans taken from abroad (which actuall y is inves tment by foreign lender into the
nation). Foreign Currency Reserves are also part of Capita l account but are
genera lly not reported. A countr y is said to be in Capita l account surplus if total
inflows into the countr y (FII, FDI and borrowing from foreign companies /banks )
exceeds total outflows (inves tments into foreign countr ies and lending to
foreign countr ie s or companie s) . In case situat ion is reversed, country has
capita l account defic it.
Payme nts always get balanced: You can spend only as much money as you have.
Or in other words, total amount you spend and inves t must always be equal to
the money you have earned and loans you have taken. What this means in the
context of BoP is that current account surplus must always be balanced by
Capita l account defic i t and if a countr y is having current account defic it, it must
always get equivalent money form of capita l account surplus.
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19. BoP and Forex Reserves : Countr ie s having float ing exchange rate and free
capita l flows do not have to build foreign currency reserves. But as we have
seen earlier , those who exercise some or full control over exchange rate, do so
by manipula t ing their Forex Reserves. The difference in current account surplus
and capita l account (excluding forex reserves ) defic it is balanced by equal
increa se in forex reserves (China) and if countr y is not able to meet current
account defic i t by capita l flows, then it will have to liquida te its forex reserve
(curre nt situat ion of India ).
For example, China whic h has huge exports (current account surplus) as well
has huge inflows in FDI and FII, balances this by building up huge forex
reserves as well as by inves t ing in foreign countr ies . Chinese government parks
large percentage of its surplus into US government bonds and encourages its
government backed and other companie s to buy assets in foreign countr ies
(most ly US). So it delibe ra te l y runs huge capita l account defic it so that it can
export. Otherwise , it will have to let its artific ia l l y depre ciated currenc y
apprecia te. This is intere st ing and perhaps topic for another future artic le.
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Negative Fe edback Me chanism
Example of negat ive feedback system
Wikiped i a define s negat ive feedback as follo w i ng “Negat iv e feedback occurs
when the result of a process inf luences the operat ion of the process itself in
such a way as t o reduce changes.” In order to understand this concept look at
the adjacent diagram (Again taken from Wikipedia ). As you can see in the
diagram, when water level in the reservoir decreases, the piston stopping water
flow is lifted and water starts to pour in. When water is filled, the piston will
again come down to stop more water from pouring and this will mainta i n the
water at desired level. The equilibr ium level of water will be det ermined by the
arrangement of the system rather than the flow of water.
Similar negat ive feedback system exists in economics . For example, conside r
exchange rate and export- impor t. Actual situat ion will be very complica ted
because of a large number of variable interac t ing together. To keep things
simple, we will conside r only two variables at a time – export- impor t and
exchange rate. As we have discussed above, apprecia t ion
currency causes increa se in impor t while discourages export. This will lead to
increa se in demand for foreign currency and simultaneous l y increa se in supply
of local currenc y. This putting a downward pressure on exchange rate. If
government does not inter fe re and there is no net capita l flow, then exchange

20. rate will quickly adjust such that values of imports and exports are perfect l y
matched.
Relat ion between interes t rate and exchange rate (Interes t Rate Parity)
Another beautiful example of such feedback system is intere s t rate parity. In
order to expla in it lets assume Interes t rate for borrowing in USA is 4% and
intere s t one gets on government bond in India is 8%. It will make perfect
busines s sense if you borrowed $1000 from USA, purchased India n government
bond and after a year you got intere st of $80. Paid $40 as intere st to the bank
you borrowed from, and made a profit of $40. That without inves t ing a single
penny of your own. Such situat ion where you can make money without inves t ing
any capita l at all is called arbitrage (which in itse lf is fascina t ing financ ia l
concept and deserves a comple te artic le on itself ).
The only problem with this is it will not be only you who can think of this.
Other people too would want to make profit out of this opportuni t y and soon
there will be many dollar s flowing from USA to India causing India n Rupe e to
apprecia te in compar ison to USD and whatever gains you could make from
excess interes t rate will be offset by the increa se in exchange rate.
Self fulf i ll ing prophec ie s or Posit ive Feedback
Direct l y opposite to the concept of Negative feedback is Self Fulfil l ing
Prophec ie s or Posit ive feedback. For example suppose there is a rumor,
comple te l y unfounded, that the price of gold is going to increase to very high in
a week. People will want to profit from this informa t ion and will buy some gold
to sold later at higher price. Init ia l l y, some people will be fooled by the rumor
and buy gold. This tempora r y surge in short term demand will lead to
mome nta r y increa se in price. This increase in price will give credence to the
rumor, and more people will flock in to buy gold. This will further increase the
price, pulling even more people. The rumor , whic h originated without any
analys is or “funda m e nta l ” cause, was the reason itself for the rumor becomin g
true.
Such positive feedback are very common in our life , enginee r ing and economics .
In context of exchange rate, somet imes positive feedback plays a prominent
role. Suppose, all the traders in foreign exchange market believe that rupee has
deprecia ted far below its ‘int r ins i c’ value and it will apprecia te in near fu ture.
In order to profit from this antic ipa ted gain, they will try to hoard the rupee,
thus increa s ing its demand and causing it to appreciate.
20

21. Opposite of this is also true. If traders believe that rupee (or for that matter any
currency) is about to deprecia te , they might actuall y trigger it by shorting the
currency.
The paradox of negat ive and posit ive feedback
What seems to be posit ive feedback in short term might actually be negat ive
feedback if looked broadly. For example, lets look at the currency example
again. The genera l belie f that currenc y has fallen far below its true value caused
it to apprecia te through posit ive feedback mechanism. But, at the same time it
also prevented currency to deprecia te further and hence acted as negat ive
feedback.
Exis tence of negat ive and positive feedback loops give rise to severa l
intere s t ing phenomena in economic s and in other areas. But the artic le has
already surpassed 2600 words, so I can not give many example s. However , one
example very crucia l to our ongoin g discuss ion can not be omit ted. It is what
economis ts say Impos s ible Trini ty.
Impos s ible Trinity
The concept of imposs ible trinity states that a countr y (or an economy) can not
simul taneously have Fixed exchange rate, Free capita l flow and independent
moneta r y polic y (whic h roughly means control over interes t rate).
For example, suppose India pegs its currenc y to say Rs. 60/$ and intends to
mainta in free capita l flow. Now, if it sets interes t rate that is higher than that of
USA, then money will start flowing in from US to bank on this arbitrage
opportuni t y (as we discussed earlier ). So, in order to mainta i n its exchange rate,
it will have to buy Dolla r s. But it will have a limi t to how much it can buy.
Similar ly, if it sets intere st rates lower than US, money will start flowing out.
To prevent rupee from falling, it will have to sell off its dollar reserve. But that
can last only till its reserves gets full y depleted. Thus government will have to
set interes t rate equal to that of US.
If you look closely, India, in recent times, has tried to achieve this impos s ible
trinit y to some extent. It kept currency undervalued, wanted foreign inves tors to
come in, and had to incre ase intere s t rate to contain infla t ion. What makes this
more ludic rous is that it was attempted when our premie r is a trained economis t !
Now let us look at the unprecedented devalua t ion of rupee more closely.
21

22. Cause s
What is good for Economy is bad for Polit ic s : India’s trade balance is highl y
unfavorable. What this means is India impor ts far more than it exports. In fact,
India n export is only about 80% of its impor ts, a defic it of about $ 120 bn
(2011). This defic i t is largely balanced by remit tanc es (whic h stood at $69 bn in
2012), FDIs and FIIs.
Economica l l y it makes sense for India to let its currency apprecia te because it
will make impor ts cheaper and help reduce its trade imba lance. But,
apprecia t ing currenc y will have negat ive impac t on its exports. Now, India
mainl y exports labor intens ive goods and service s – Software service s, polished
diamond, textile s, processed cashew nuts, leather goods. These sectors genera te
huge employment. Apprecia t ion of currency causes fall in the profitabi li t y in
these sectors, leading to many people loose their jobs. Looked from perspective
of polit ic ians, this is hugely unpopula r.
Even though the overall gain from apprecia ted rupee is far more than the losses,
gains per individua l are small in magni tude and distributed over a large
populat ion; whereas losses per individua l is large and concentra ted in minor it y
of the popula t ion. Such polic ie s are imposs ible to pursue in a democrac y like
India because those at loss will be far more vocal while people at gain will not
bother at all.
Under such polit ic a l conside ra t ions, our government, a coalit ion of severa l
parties can not afford to be bold. So, in last 5-6 years, driven by impres s ive
economic growth of India, when foreign inves tor s flocked, there was upward
pressure on the rupee. Government was unwil l ing to let rupee apprecia te and
kept it artific ia l ly devalued. In the process it amassed huge foreign exchange
reserves (about $300bn). Where did the government bring this money from? It
simply printed the money!
Printing of more money causes infla t ion, another polit ica l l y unpopula r thing.
So, in order to curb the money supply, government issued bonds under Market
Stabiliza t ion Scheme (MSS bonds). It did curb the infla t ion to some extent, b ut
when bond mature s, government has to pay the money along with the inte re st .
So, this scheme does not really curb infla t ion, it postpones it. When those bonds
matured, government made payme nts, again by printing more money, as
government is running budget defic it and does not have income to pay. This
caused infla t ion whic h you might have noticed during recent times. How does
government curb infla t ion now? It increa sed intere s t rate to reduce the supply of
money.
Increase in intere s t rate caused a slowdown in growth. Also, globa l economic
slowdown reduced demand for India exports and exports fell too (about 30% in
22

23. last year). Import however , did not fall by that amount because Oil, the major
component of our impor ts, is essentia l commodity. So the trade balance turned
more unfavorable. Also, looking at the slowing pace of growt h new inves tor
abstained from inves t ing in India and older inves tor too started to get uneas y.
As they tried to pull back their money, it put downward pressure on rupee.
If foreign inves tor expects the currency of a countr y to fall, it will withdraw its
inves tments because its inves tment value will fall with the currenc y. For
example suppose you inves ted $1000 at Rs.40/$. So your inves tment in India is
Rs. 40000. Tomorrow if rupee falls to Rs. 60/$ then value of your investment
has falle n to $667. Foreign inves tors fearing further fall in rupee started to flee
India n market and this put further downward pressure on rupee (Posit ive
feedback). Government could inter fe re , but owing to its huge budget defic i t, had
limi ted resources and rupee had a free fall. There is more to it, but the artic le
swelling like Dolla r.
Impact
Economists do not agree about impac t of nomina l exchange rate on real
economy. Many argue that Nomina l values do not have any impac t on real
economy while others claim that the effect nominal variables have on human
psychology and expectat ions of future does hamper real economy (applying
posit ive feedback, you can see how?).
Two very visible impac ts are 1. increas ing oil pr ices and 2. India gaining
compet it ive advantage in certain export. Why oil price is incre as ing is quite
obvious. The later impac t needs some elaborat ion. What has made the
devaluat ion of rupee more problema t ic is globa l slowdown. Alternat ively, it
might well be that this downfa l l was brought about by the globa l slowdown. But
in either cases, the demand for goods and servic es in developed economy is
dwindling. But demand in certain goods like textile will not be impacted that
much (people are not going to shun wearing cloths because of slowdown). Main
compet itor of India in such sector is China. During the same period when India n
rupee has been falling, salar ie s of labors in China has been on the rise. This had
made India n export more favorable.
Another impac t, whic h may seem like silver lining in the dark cloud is that it
has forced government to bring certain economic reforms (FDI in retail and
other sectors) and has brought a near cris is like situat ion which can force
unwil l ing government to bring reforms (as it did in 90s).
23

24. In macroeconomics theory, when a countr y’ s currenc y declines, its exporters should
soon get a boost as the lower currency makes their goods more competitive. By
that rule, India should be, right now, enjoying an export boom. Since the start of
May, the currenc y has dropped 23 percent, making it one of the world’s worst
performe r s. Sure enough, exports did go up in July, rising 11.6 percent year -on-year,
the best increa se in more than 12 months.
Consumer s worldw id e should n’ t expect to see a surge in Made- in- India products in
the coming months, however. The July increase comes after a period of
weakness : India’ s exports dropped 1.8 percent in the 2012 -13 fisca l year. And
while the currenc y has been steadily weakening for two years, the dec line of the
rupee hasn’t helped narrow India’s current - account defic it. Instead, the trade
gap has just gotten bigger , hitt ing 9 percent of gross domest ic product in the
first quarter.
BAD NEWS:
One culpr it is rising prices inside India, with the consumer price index jumping
9.6 percent in July. India’ s high inflat io n underc uts the competit i ve nes s gains
from depreciat ion. Any benefit [from the weak rupee] will be offse t by the fact
that there is a huge infla t ion problem in India, and the cost of manufa c t ur ing is
very high forlocal companies .
The cost of India’ s impor ts , whic h are domina te d by petrole um and gold, have
shot up, and the fall in the value of the rupee will push them higher still.Ris ing
costs of raw materialsa re making busines s challenging. A stronge r and a stable
currency is always better for businesses .
24

25. For Indian exports to boom, local exporters need trading partners with healthy
economies . There aren’t many of those around, making an export - led recovery
diffi c ul t. India’ s struct ura l proble ms also make it harder for local exporter s to
cash in on the weak rupee.
The countr y’s manufa c t ure rs have suffe re d from India’ s sorry histor y of
under investing in ports, roads and other infras t ructure. The infra s truc ture deficit,
lowers growth potential and discourage s foreign direct investment.
In the corporate media there is widespread discuss ion of whether India could soon
confront a current account cris is akin to that in 1991, when India was forced to
seek an emergenc y bailout from the IMF.
In recent weeks foreigner s have been selling Indian government debt and now
reportedly hold just 43 percent of a government limit of $30 billion. Nervous
overseas investor s responded by pulling more than $11 billion dollar s out of
Indian stocks and bonds.
Over the past severa l years, India has financed much of the current accounts
defic it through short- term debt. The total short term-debt due before March 31,
2014 now amounts to a stagger ing $172 billion. The payme nt of this debt will
consume over 62 percent of the foreign exchange reserves .
The timing is particula r ly tough for consumer companies that were counting on
India’ s Septembe r- to- De ce mb er holid a y season to spur sales. India’s consume rs ,
whose spending helped see the country through the global financial crisis in 2008,
are closing their walle ts, squeezing companies from carmake rs to shampoo
selle rs .
Companie s that impor t finished goods or raw mater ia ls are the worst hit as they
scramble to hold onto margins while balancing the need to raise prices without
deterring buyers.
India’ s total consump t io n expend it ur e, whic h inc lud es private and gover nme nt
spending, grew 3.3 percent in Jan-Marc h 2013 from 9.3 percent in the same
period a year earlier , according to government estima te s. Tota l consumpt ion
expend it ure as a share of the countr y’s gross domest ic product fell to 65.9
percent in the fourt h quarter of 2012/13 from 72.1 percent in the first quarter of
the same fiscal year. While many consumer companies have resorted to price hikes
to cope with the currenc y, long- te rm supplier contracts and hedging are helping
some to bite the bulle t for now.
More funda m e nta l l y, the crisis is rooted in a dramat ic slowin g in India’ s
economic growt h and its growing, massive dependence on inflows of foreign
capita l to meet its current account deficit. In the last fisca l year, whic h ended March
25

26. 31, India recorded growt h of 5 percent, the lowest in a decade, and far less than
the minimum 8 percent needed to prevent a rapid rise in unemployment.
The government won a victory on Aug. 26 with the lower house of Parliament
approving a plan to provide subsidized grain to two- third s of India’ s 1.2 billio n
people. That might help Congress stay in power next year, but it also increa se s
concerns that the government is backtracking on promise s to cut the budget
defic it .
Few Good News
Informa t ion technology outsourc er s such as Tata Consultanc y
Service s and Infosys have grown, thanks to low-cost workers in Bangalore and
other India n citie s,
The government is aware of the structura l problems and wants to make large
inves tme n ts to impro ve infr as t r uct ur e in a manufa c t ur in g “ind us t r ia l corridor ”
between Delhi and Mumba i.
Higher costs in China, meanwhi le, are leading some labor - intens ive
manufac turer s to look for alternat ive s in Asia, creating an opportuni t y for
India, To take advantage of the opening, India needs to revise rules that make it
difficul t for large employer s to hire and fire workers.
Role of Gove rnme nt
Over the past three months as the rupee has deprecia ted, the government has
announced a series of measure s aimed at attract ing foreign capita l— inc luding
removing or lower ing foreign inves tment caps and further reducing government
spending at the expense of working people. But these have failed to arrest the
rupee’s slide.
Role of RBI
India’ s centra l bank, the Reserve Bank of India, mount ed a major inter ve nt io n in
foreign exchange markets after the India rupee—whic h has depreciated by more
than 15 percent since May—crashed through more than 60 rupee per US dolla r
mark.
Sections of corporate India have been pressing for the Reserve Bank of India
(RBI) to abandon its reputed preoccupat ion with curbing infla t ion, whic h at the
retail level is current ly close to 10 percent, and lower intere st rates so as to
stimula te economic growt h.
Instead, to stop the rupee’s slide, the RBI has tighte ned liquid i t y, thereby
driving up the cost of credit and further undercut t ing economic growth, and has
26

27. sold off dolla rs , drawing down its foreign exchange reserves to about $277
billio n.
In a furt he r attemp t to stem the rupee’s slide and the deplet io n of its foreig n
currency reserves especia l ly US dollars , the RBI imposed capita l controls on
August 14. Hencefor t h India n corporat ions—wi t h the notable except ion of large
government-owned enterpr ises or PSUs (Public Sector Units) —wil l not be
allowed to inves t more than 100 percent of their net worth (assets minus
liabil it ies ) outside the countr y in any year; individua ls will be restricted to a
maximum of $75,000. Prior to this, the annual ceilings were 400 percent and
$200,000 respectively. The import of gold coins, which the government claims
has contributed to the current crisis, has been banned.
RBI vs .Gove rnme nt
The crisis enveloping the India n economy has caused increa s ing frict ion
between the Congress- led India n government and the RBI. While the former has
repeatedly made known its preference for intere s t rate cuts aimed at boosting
growth, the RBI has resisted, arguing that infla t ion needs to be contained and
that a furt her erosion of the rupee’s value, will, by drivin g up energy
costs(Ind ia ’s impor t s three -quar te r s of its petroleum) seve re l y dampen growth.
Also, it is acutely aware of the large foreign borrowing s India’s corporate giant s
have contracted, seeking to take advantage of the much lower interes t rates that
have prevailed in the U.S. and Europe since 2008.
The conflic t between the RBI and the government reflec ts the fact the India n
economy is now caught between a proverbia l rock and a hard-place , with the
India n elite facing a choice between trying to boost economic growth by letting
the rupee slide still further, thereby fueling growth- sapping infla t ion or
defending the rupee by tightening credit and thereby further squeezing economic
growth. And in the backgro und looms the threat of a rapid deplet io n of India’s
reserves as foreign capita l spurns a crisis - r idde n economy
27

28. Lacking Confide nce
BNP Paribas slashed its economic growth forecast for India for the fisca l year
to March 2014 to 3.7 percent from its previous 5.2 percent – the weakest growth
since 1991-92 when India buckled under a balance of payments crisis that
required a loan from the Internat ional Monetar y Fund.
“Ind ia ’s parlia me nt remains toxica l l y dysfunc t io na l with litt l e, if
any, busines s co nd uc ted , ” BN P said.
The rupee has plunged more than 20 percent this year, by far the bigges t
decliner among the Asian currenc ies tracked by Reuters.
Yet the government has so far failed to provide a coherent response, analysts
said. Its approval of infra s truc ture projects was trumped by concerns about the
fisca l defic it after India’ s lower house of parlia me nt approved in August a 1.35
trill ion rupees plan to provide cheap gain to the poor.
In its latest init ia t ive , the government proposed setting up a task force to look
into currency swap agreements , a measure analys ts said could bring some relie f
if carried out in time by reducing market demand for dollar s or other major
currencies.
28

29. Conclus ion:
Though growth has slowed down in recent time s, the fundamenta ls of our
economy remains strong. Steps are being taken to contain the fisca l defic i t and
boost industr ia l inves tments.
Farmers in selected cluste r s adopted good agricul tura l practic es and benefited
from the yield advantage of hybr id rice technology. Impact of good monsoon
will graduall y put impetus for growth and consumpt ion prima r i l y from rural
India. It will also help in reducing infla t ion as surplus food product ion will help
reduce price, assuming that rupee bounces back and stabilizes in near future.
Growth in exports should also pick up as other major economies revive growth
and a feeble rupee will be able to fetch dollar s whic h in return will translate
into more rupees. Also, a comparat ively weak rupee will make India n produce
more competit ive in globa l markets and this by itself should, over time , help to
reduce impor ts and increa se exports.
Limite d Impact For Mos t: A sustained rupee deprecia t ion is unlike l y to have a
negat ive impac t on the credit ratings for most inves tment - grade issuer s that
come under the Fitch Ratings India n National scale. Two hundred and seventy-four
(account ing for over 92% of outstanding debt) of 302 public l y rated issuer s
are unlike l y to face a negat ive rating action should the rupee trade between
INR55/USD1 to INR60/USD1.
Some Negative Actions ; De faults Unlike ly: The remaining 28 issuers may
expect negat ive rating actions, such as a change in Outlook or downgrade of the
29

30. rating, in the event of susta ined rupee deprecia t ion. Fitch does not expect any of
these issuer s to default .
Bene fit For Exporte rs Capped: The posit ive impact on operating margins and
leverage for export-or iented companie s, whic h typic a lly benefit from currency
deprecia t ion, is expected to be lower than histor ic a l ly observed. Fitch expects
that lower demand in the globa l economy, aggress ive price renegot ia t ions,
hedging of foreign-cur renc y exposure s and the negat ive impact of foreign -
currency debt servic ing will act to cap the benefit to credit profile s of
companies in the pharma ceut ic a l, technology, textile, and mining sectors
Highe r Price s Pas sed On: Some impor te r s are able to pass on higher prices
from depreciat ion because of impor t parity price (IPP) practic es prevale nt in
their indust r ie s, such as companies in the oil and gas, or metals indust ry.
Companie s in the auto ancilla r y sector typica l l y have contracts to pass on higher
costs to their original equipment manufac ture rs . However, the slowdown in end -
user demand may force companie s in the auto ancillary sector to absorb some of
the price increa se s.
Bearing the Brunt: Companies in the chemic a l, fertil ise r or paper indust r ies
tend to import a signif ic ant portion of their raw mater ia ls, as do cement
manufac turer s without adequate domest ic coal links. They are unlike l y to be
able to pass on higher costs because of current low demand, which will hurt
margins. The credit profile for these sectors will be, on a relat ive basis, most
affected by rupee deprecia t ion.
No Dire ct Forex Exposure : There is no direct operationa l exposure to foreign
currency for 121 issuers (35% of overall debt). The potentia l benefit of
reduct ion in globa l commodity prices to margins for companie s in sectors
including real estate, metal processors, chemica l processors and print media will
be offse t to a large extent by the rupee deprecia t ion.
Impact on Sub-Inve s tme nt Grade : The potentia l posit ive operationa l impac t on
sub- inves tment grade companie s is like ly to be more limi ted than that of
corresponding investment grade peers in indust r ie s such as textiles, technology
and pharma ceut ica ls .
Wors t-Hit Se ctor: Sub- inves tment grade companie s in the chemica l, meta l
processing and trading (in processed and unproces sed imported commodit ie s )
indust r ie s are expected to face lower margins, higher inventor y levels and
stretched working capita l. They may be the worst casualt ies of the rupee
deprecia t ion, particular ly if they have limi ted financ ia l flexibil i t y.
30

31. Appre ciat ion Unlike ly: The rupee is unlike l y to apprecia te in the short term
until globa l risk avers ion subside s, according to Fitch.
The prima r y focus of this analysis is to evalua te the impac t of rupee
deprecia t ion on the credit profile of those inves tment grade companie s with
direct exposure to foreign exchange risk. The analys is evaluate s the stress that
these issuer s will experience if the rupee trades between INR55/USD1 to
INR60/USD1 for a sustained period of more than six months. Fitch notes that a
temporary fall to say INR60/USD1 for a very short per iod is unlike l y to impa ir
the balance sheet strength of such inves tment - grade issuer s.
Fitch analyse d 302 issue rs that are public l y rated at inve stm e nt grade („Fitc h
BBB- (ind) ‟ and above) according to Fitch‟s natio na l scale. The total
outstanding adjusted debt (gross debt plus lease adjustment minus equit y credit
for hybrid instruments plus preferred stock) for this group is INR8,639bn, of
whic h about 25% is denomina ted in foreign currency, based on latest available
data.
Over 92% of the of overall adjusted debt is rated „Fitc h A−(ind )‟ or above.
O ver 97% of the forex debt is with companie s current l y rated at „Fitc h A - (ind )‟
or above. As such, these companies are expected to weather any signi fic ant
economic downtown.
Direct Forex Exposure
89% of foreign currency debt is held by net impor te rs . However withi n the net
impor te rs ‟ group, 90% of the foreign currenc y debt is held by just nine
companies . O f them the lowest rating is „Fitc h A−(ind) ‟ . Five of them are at
„Fitc h AAA(ind )‟ and three are at „Fitc h AA(in d) ‟. These issuer s have
signi ficant cushion available in their respective ratings and they are comfortabl y
placed to weather any financia l stress on account of signi f ic ant rupee
deprecia t ion.
Impact on Debt
Se ctor-Wise Credit Impact
The section of report focuses on the impact of on credits from a rupee
deprecia t ion on sectors where the impact (both posit ive and negat ive) is
pronounced. These sectors are not only core to the economy but also have
signi fi ca nt represent at i o n in Fitch‟s inves tment grade nationa l rating univer se .
These sectors form four groups :
31
metals)
ys to mit iga te deprecia t ion (chemica l, paper,
cement)
-dr ive n exposure.

32. Ne t Exporte rs
This sector consists of either pure exporters (cotton textile, technology and
mining) or companies where exports are much higher than impor ts (synthet ic
textile ,pharmac eut ica ls and jewelle ry). Histor ica l data sugges ts that rupee
deprecia t ion may be an enabling factor but need not be a driving factor for
export growt h.
Exports (in dollar terms) from India grew at rates highe r than 20% (yoy) from
2003 to 2008. This period also coincided with histor ic a l ly high globa l GDP
growth levels (in excess of 4.8%) not observed since 1980 and correspondingl y
high globa l trade volumes. However over most of the period the rupee
apprecia ted against the dollar.
Thus while rupee depreciat ion would have a posit ive impact on majorit y of
companies in these sectors, a fall in globa l demand from histor ica l levels may
signi ficant l y limi t the degree of the posit ive impact . Addit iona l l y, aggress ive
price negot ia t ion from corporate clients of such exporter s may potentia l l y
further limit the benefits.
More established player s in pharmac eut ica ls and technology, whic h typica l l y
hedge in excess of 40% of their foreign currenc y exposure, may have a limi ted
upside to credit profile s. Debt servic ing of foreign currency loans by a
signi ficant number of pharma ceut ic a l and textile companie s is expected to limi t
improvement of credit profile s.
Pharmac eut ic a ls
Of the 11 pharmac eut ica l companie s rated inves tment grade, 10 are direct ly
exposed to foreign currenc y risk. In nine companie s, the rupee depreciat ion is
expected to have a posit ive impact .
The export data pertinent to this sector tend to sugges t that globa l demand has a
higher impac t on export volume s than the rupee exchange rate.
Technology
The impac t of forex deprecia t ion will be nominal for four of 13 technology
companies rated by Fitch. Details of the remaining nine are provided below:
Better-es tabl ished software companie s tend to hedge a higher proportion of their
forex exposure than relat ively smaller players . Those companie s that expose a
higher proportion of their cash flows to forex risk would temporar i l y enjoy
higher margins, though the long- te rm risk profile may not improve given the
inherent higher volat il ity.
HCL Infosys tems Limited is the only company in this group whic h may have a
negat ive impac t on margins. The company impor ts signi ficant proport ion of its
components, while it has signif ic ant fixed cost contacts for systems integra t ion
and computing. However, the company has been trying to convert dollar-denomina
ted purchase s into rupee-denominated buying.
ITES segment has exhibi ted relat ive l y higher margin expansion with respect to
rupee depreciat ion than pure softwa re player s. The sector may benefit against
32

33. compet itors from countr ie s such as the Philippines whose currency has
apprecia ted relat ive to the rupee (see Appendix 1).
Mining (Iron Ore)
Fitch‟ s portfo lio of minin g companie s mainl y comprise s iron ore miner s. These
companies derive about half of their revenue s from exports. Of the six
companies in this sector, whic h are rated in inves tment grade, five are direct ly
impac ted by rupee deprecia t ion.
Textiles
The rupee depreciat ion would have a overall posit ive impact on the texit le
sector. However, the degree of positive impac t will be more limi ted than
observed histor ic a l ly given the muted demand in customer countr ies .
Histor ic a lly export volume s for segments such as cotton yarn/fabr ic and
synthe t ic yarn/fabr ic have benefit ted the most from rupee deprecia t ion. The
export volume s of ready-made garme nts had limi ted benefit of rupee
deprecia t ion in the past. Incrementa l volume growt h may not be expected,
particula r ly in cotton textile (as it is relat ive l y less affordable than synthet ic s )
and ready-made garme nts.
Addit iona l l y, the extent of margin benefit may be muted for more well
established player s who tend to hedge substant ia l portion of forex exposure. For
insta nce, Bhart iya Internat io na l Limi ted („Fitc h A−(ind )‟ /S ta b le‟ ) hedges up to
70% of its forex exposure. For O rient Fashio ns Exports Private Limite d („Fitc h
BBB−( ind) /S ta b le‟ ), the forex gain has been negated by forward hedge posit io ns
at a lower- than-preva i ling USD/INR exchange rate.
Gems and Jewellery
In Fitch‟ s inve stm e nt grade unive rs e there are two companie s in the gems and
jeweller y sector. Suashis h Diamo nds Limite d („Fitc h BBB‟/St ab le ) is an
exporter and would like ly be positive l y affected operationa l l y. BC Sen &
Company Limited is a domest ic jewelle r y retailer . Most gem and jewellery
exporter s are expected to have a benefit operationa l ly. However a lot of such
exporter s were thus far genera t in g signi f ica n t „other inco me ‟ because of the low
US dolla r Libor rate, a high domest ic fixed-depos it rate and favourable
dollar / rupee forward rates. This income was often 12% to 15% of the PBT of
such companies . However, this profit opportuni t y is like ly to diminis h given the
reduct ion in domest ic deposit rate and a rise in dollar /rupee forward rates. Thus
the observable incrementa l benefit to margins (due to rup ee deprecia t ion) may
actuall y be negated in case of some companies .
Importe rs With Ways to Mitigate Depreciat ion
This group essentia l ly consis ts of indust r ie s that are net impor ter s. They are
usually able to pass on cost hikes from the rupee deprecia t ion either due to IPP
33

34. norms followed in the indust r y (eg oil and gas, steel and non- fer rous metals) .
However, there are sectors such as auto ancilla r y where the cost rise is passed
on to the origina l equipment manufa cturer (OEM) as per contract .
Auto and Related
Of the 29 inves tment grade companie s in this sector, for three companie s the
direct impact of foreign currenc y deprecia t ion will be insigni f icant . The details
of 26 issuers are provided below:
Fitch- ra ted auto supplie rs are like l y to remain largely unaffec ted by current or
even sharper rupee deprecia t ion. Within this sector there is a subsector of
companies whic h would clearly benefit from export revenue ( assuming stable
demand in their export market) while the other subsector would consist of
companies that are net impor te r s but would be able to pass through to the OEM
a signi fic ant portion of the price rise due to rupee depreciat ion.
Net exporter s such as QH Talbros Limi ted, Ashok Leyland Ltd., Hi-Tec h Gears
Limited, Minda Corporat ion Limited and Beri Udyog Private Limi ted are
expected to be posit ive l y impac ted in terms of operating cash flow.
The second subcategor y of companies has histor ica l l y been able to pass on the
cost rise to the OEM. However Fitch believes that the auto OEMs currently
experienc ing lower demand would be resistant to the past practise. Fitch
believes that these price rises would be shared through the entire auto supply
chain. Thus the benefits of rupee deprecia t ion on this sub -categor y of auto
ancilla r y companie s margin would be lower than would have been expected from
histor ica l observat ions .
The auto and related sector has a relat ive l y higher proport ion of companie s
having a hedging strategy. Within the 29 companies in this sector, 18 have a
consis tent forex hedging strategy, where on an average 40% to 60% of the
foreign currency exposure is hedged. This is expected to moderate the impac t of
rupee depreciat ion.
Negative impact on operating margins may be expected on companies including
Punch Ratna Fastener s Pvt Ltd, Sterling Tools Limited and Deltroni x India,
whic h have signi ficant imports. However, the rating headroom is suffic ient in
most instances .
Fitch notes that the India n subsidiar ies and joint ventures of globa l supplier s
would be worst hit owing to very high dependence on parents for input mater ia ls
and components. Emitec Emiss ion Control Technologie s Private Limi ted is one
such example.
On a posit ive note, Fitch could see stepping up of effor ts to localise some of
these impor ted input mater ia ls as well as the components by OEMs, whic h
would benefit the domest ic auto supplier s in the medium term.
34
Oil and Gas

35. The impac t of INR deprecia t ion on Fitch rated oil and gas companie s can diffe r
across public sector entit ies (PSE) such as IOC, HPCL and private refiner s like
RIL and Essar Oil Ltd . Private refiner s that impor t the bulk of their raw
mater ia l could see their operating profitabi l ity fall in the range of 1% to 3% if
an exchange rate of INR55/USD persists. Exports for RIL (50%-60% of revenue)
and Essar Oil (20%-40% of revenue ) can only provide limited mit iga t ion.
Though these companies export a large part of their refined petroleum products,
the prices of many of these crude derivat ive or petrochemica ls is determined by
the demand- suppl y situat ion of end-products. This makes the pass- through of
high input prices difficult .
Forex borrowings for most of Fitch- ra ted oil and gas companies are low (0-20%
for Essar, HPCL) to moderate (20%-50% for IOC, Petronet ) except for Relianc e,
whic h has about 90% of its borrowing denominated in forex. Since public sector
enterpr ise s are rated based on their strong linkages with government of Ind ia,
Fitch does not expect their ratings to be impac ted by currency movements .
Relia nc e‟ s credit metrics could be weakened because of its signi f ic a nt forex
borrowings and the like ly impact of a rupee deprecia t ion on its operating
profitabi l ity. However it is still like l y to remain very comfor table for its rating
level.
O n the contrar y, the impac t of susta ined rupee depreciat i o n on Essar O il‟s
operating profitabi l ity and financia l leverage – despite low forex borrowings –
could stretch its credit metr ic s beyond the agenc y‟ s comfor t leve l.
Metals
Globa lly, the price has falle n for ferrous and key non- fer rous meta ls over the
last 12 months (steel about 14%, aluminium 25%, copper 19%). However , due to
IPP and rupee deprecia t ion the prices in India n market have remained broadly
unchanged from levels seen a year ago. Thus operating margins of India n meta l
producers are expected to get substant ia l support from the rupee d eprecia t ion
agains t globa l fall in metal prices. The extent of a benefit would depend on
degree of backward integra t ion (with respect to ore mines and links to coal
mines ), with more inte gra ted players like ly to receive a higher benefit . This
indust r y has high dependence on imported coal/coke, and would be to the same
extent, adverse ly affec ted by rupee depreciat ion.
Ferrous - Primar y Steel Producers
Among Fitch rated Prima r y Steel producers Tata Steel Ltd (TSL) and Steel
Author i t y of India Ltd (SAIL), whic h have relat ive l y higher levels of vertic a l
inte gra t ion, are expected to receive more cushion from the rupee deprecia t ion
agains t a fall in margins. However, players with limited or no vertic a l
inte gra t ion (such as RINL) would be more adverse ly affec ted. Not only do these
companies have to impor t coke but the iron ore from domest ic market would be
more expensive by 10%, given the hike of iron ore by NMDC Ltd, India's larges t
iron ore miner .
35

36. Fitch believes the ability of steel producers to incre ase prices is limi ted because
of the current weak end-user demand. Foreign currency loans will also result in
higher financ ing charges and lower net profits. However in most cases the rating
is unlike ly to be affected given the suffic ient rating headroom. The except ion is
BPSL. Its export busines s is expected to have a positive impac t on margin.
However BPSL has low rating headroom given its exist ing high leverage on
account of its capacit y expansion.
Alloy/Spec ia lt y Steel and Steel Products
Alloy/spe c ia l ity steel producers using electr ic arc furnac e for steel making are
largely dependent on steel scrap (most ly impor ted) for their operations. Globa l
scrap prices have softened by 6% as of end-May 2012 (from end-March 2012) as
agains t a steeper fall of 10% in the USD/INR rate during the same period. Such
companies usuall y enjoy some sourcing flexibi l ity as scrap iron may (to an
extent) be replaced by sponge iron. However, their sourcing flexibi l i t y may be
limi ted because of the disrupt ion in operations of many small sp onge iron
companies located around Karnataka and Goa due to problems relating to iron
ore mining.
Indire c t Impact of Rupe e Depre ciation
These are companie s that would essentia l l y be purchase rs of commodit ies linked
to IPP. Their busines s models are comparable to net impor te r s to the extent that
the infla ted cost (due to rupee deprecia t ion) of their raw materia ls would not be
easily passed onto the custome r. These are sectors such as real estate (steel and
cement comprise close to half of construct ion cost ), print media (newspr int and
Pulp), and meta l (both ferrous and non- fe rrous) processors. While the globa l
reduct ion in commodi t y prices would have actuall y benefit ted their cost
structure and may have boosted demand, the more than commensura te rupee
deprecia t ion has snatched away the advantage.
Impact on Sub-Inve s tme nt Grade Is sue rs
Sub- inves tment grade companie s are always more vulnerable to busines s cycles.
The direct iona l impact on operating margins may be comparable to the sectors
in whic h they belong. Thus textile, pharmac eut ica l and technology companies
are like ly to make an opportunis t ic gain due to their unhedged posit ion.
However they are more like ly to face drastic price renegot ia t ions from their
customer s.
Companie s in sectors such as chemica l and metal processing are more like ly to
absorb signi ficant price rises (due to depreciat ion, whic h would affec t their
margins and signif ic ant l y stress their credit profile ). The impac t on traders of
processed and unproces sed commodi t ies (meta ls , chemic a ls , papers, rubbers) is
expected to be similar l y stressed. In each of these cases, the higher cost of
inventory, along with a possible increa se in the working capita l cycle, could
stress their liquidity positions in the absence of suitable funding options.
What May Change the Proje cte d Outcome
36

37. Most of the triggers -- both positive and negat ive -- in the short term (defined as
the next 12 months) are factors externa l to India. Maintenance of the rupee at
around INR55/USD1 to IBR57/USD may depend on a relat ive ly orderly
resolut ion of the euro crisis ( to moderate flight to dollar -a sset ), a smooth
rebalanc i ng of China‟ s growt h (to prevent furt he r deterior a t io n of sentime nt
towards emerging markets) and avoiding geopolit ica l flare - ups (to prevent a
spike in oil prices) . An adverse change in any of these factors may further
deprecia te the rupee. This, would, however , feed into the deteriora t ing domest ic
balance of payme nts situat ion and aggravate it furthe r.
Given negat ive real intere s t rates and the pressure on the exchange range,
extreme l y limited scope remains for moneta r y polic y to correct the situat ion.
Similar ly, fisca l tools have limited scope without further affect ing the sovereign
credit profile, given the high domest ic fisca l defic it. Furthermore , should
inadequate rainfa l l affec t agricul tura l output, the government may be expected
to provide a stimulus to the sector as has been observed histor ic a l ly. This may
aggravate the fisca l deteriora t ion.
Domest ic policy-dr ive n solutions to address structura l issues (such as
deregula t ion of various subsidies ) may improve investor sentiment. But these
benefits take time and the immedia te impac t is like ly to be a higher infla t ion or
further demand destruct ion.
An analysis was performed on a group of 18 countr ie s rep resent ing prominent
emerging nations or countr ies that compete with India on a specific export -
oriented sector (such as textile s from Banglade sh). The countr ies whose local
currencies deprecia ted the most agains t dollar as a group have the highest
current account balance as a proportion of respective GDP. However, there are
except ions. Examples include Mongolia (ranked 18th, worst CAB/GDP) and
Chile (ranked 12th), whose currenc ies have depreciated less than 10% agains t
USD.
If the countr ies are ranked in terms of deteriorat ion in CAB/GDP ratio from
2011 to 2012, then the ranking sugges ts that some of the countr ies that have
shown the worst deteriora t ion are also countr ie s (Mongolia, Chile) that have
deprecia ted the least agains t dollar . (In fact some have apprecia ted, such as the
Philippine s and China.)
Among these paramete rs (particula r l y CAB and government fisca l defic i t
related), on an aggregated basis, India along with Sri Lanka, Mongolia , South
Afric a and Turkey have the worst deteriora t ion. The direct ion of the movement
of local currenc ie s agains t the US dolla r may be driven by the fundamenta ls .
However, this full y does not expla in the huge deprecia t ion on the domest ic
currency value against the dollar.
For instance, Brazil (whose currenc y deprecia ted the most agains t the dollar ),
may be comparable with Mexico, Mongolia, Vietnam Argent ina and Chile on the
basis of relat ive deteriora t ion of these select macroeconomic paramete rs .
However, each of these five countr ies has local currenc ies that have shown
relat ive ly much lower depreciat ion.
37

38. Impact of Globa l Risk Avers ion
Some of the countr ie s (Brazil , India, South Africa ) whose currenc y have
deprecia ted the most in the last 12 months are tracked in Figure 29. These
countr ie s, along with China and Russia , have been among the highes t
benefic iar ies of capita l inflows in emerging nations during the period of 2004 to
2008. Risk aversion may have reversed a signi f icant portion of such capita l
flows .
38

39. RESEARCH DATA TABULATION & ANALYSIS
Descript ive research: The research will provide data about the "who, what,
when, where and how" of a situat ion, not what caused it. Therefore, descript ive
research is used for a project.
Research Design calls for decisions on the Data sources, Researc h approaches ,
Research instruments, Sampling plan and Contact method.
39
Data Source s :
1>Primary Data: Questions, Personal interview (Sample size of few),
Conference conducted by reporters for research work.
2>Secondar y Data: Data from the Social Media, Internet, Books and few
Europea n delegate s on a visit to India.
Re search Approache s :
1>Surve y Researc h: Survey’s would be conducte d to find out the infor m at i o n
about the life style and impor ta nce of Europea n Union.
2>Behaviora l Data: Behaviora l Data can also be used by going through the
databases (if available ) of the financ ia l Inst itut ions and Banks and finding out
the economic state of the Europea n Union.
3>Exper imenta l Research: Experiment Research may be used to unders tand
cause and effect relat ionship between two objective variable s.
Re search Ins trume nt
1>Questionna ire : Questionna i re will contain both open ended and closed ended
questions.
2>Psychologica l tools : Psychologica l tools such as ladder ing technique, depth
interview

40. FINDINGS AND CONCLUSIONS
The rupee’s decline affect s everyo ne in the econom y because it feeds direct ly
and indirec t l y into genera l infla t ion, whic h is a continuin g problem even as
output growt h decelera te s, and therefore hits common people hard. There are
severa l ways in whic h the falling rupee immedia te ly has an infla t ionary impac t ,
one of the most impor tant of whic h is the price of energy. Since the misguided
decontrol of oil prices, it is not only the globa lly traded price of fuel but also
the exchange rate that determines domest ic oil prices. Going by the way the
economies in the euro zone and the US have been behaving, it would be naïve to
expect that the export earnings would be contr ibut ing signi ficant l y to foreign
exchange inflows in the near future. The govt should concentra te
On correcting the economic fundamenta ls rather than indulge in soap operas in a
run up to the elect ion. A better co-ordinat ion with RBI is required rather than
blame game.
Apart from all the polit ica l parties should come together in fixing the problem
and gett ing back the inves tors confidence.
40

41. BIBLIOGRAPHY
http:/ /www.ac ademia.edu/4169109/Fac tor s_a f fe ct ing_the_f luc tua t ions_in_excha
nge_rate_of_the_Indian_Rupee_Group_9_C2
http:/ / india ra t ings .co. in/upload/ re sea rch/spec ia lRepor ts/2012/7/3/ fi tch03Rupee.
pdf
http:/ / ileadkolkata.wordpres s. com/2013/11/08/rupe e -deprec ia t ion-and- i ts-impac
41
t/
http:/ /www. india s ta t. com/a rt ic le /59/nik hi l/ ful l%20text .pdf
http:/ /www.the legis t.ne t / li fe a f/2012-05-19-12-44-16/ f inance /55- rupe e-deprecia
t ion
http:/ /www. ii tk.ac . in/ ime /MBA_I ITK/avantgarde /?p=1203
http:/ /www.ca c lubindia. com/a r t ic le s/ rupe e-deprec ia t ion- and- its- impac t-on-economy-
an-ove rview-17954.a sp#.UuDDj9K6bIU
http:/ /omegagoons. com/2013/08/deva lua t io n-of- rupee- its-causes- impa ct- and-remedy/