2. Introduction
⢠What is Devaluation?
It is the decrease in exchange rate of a currency w.r.t. another currency.
⢠In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed
exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign currency.
⢠For example, Rs 24= 1 $. In 1991
while Rs. 65 = 1$ In 2014
⢠Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments.
⢠Almost all the countries of the world have devalued their currencies at one time or the other with a view to achieving
certain economic objectives
4. Path trace of RupeeâŚ
⢠The Rupee-Dollar parity of 1947
⢠When India achieved independence in 1947, there were no external
borrowings on Indiaâs balance sheet! The exchange rate as on 15 August
1947 was 1 US$ = 1 INR. With the introduction of five year plans, Indian
government needed foreign borrowing and this required the devaluation
of the Rupee. The trend was exacerbated by the Indo-China war of 1962
and the Indo-Pakistan war of 1965 which forced the government to
further devalue the Rupee as the country was in dire need of USD for
importing weapons.
5. ⢠Devaluation during the high inflation period of 1970s
In the year 1966, under the prime minister-ship of Mrs. Indira Gandhi, inflation was increasing at an
unprecedented rate. This was also a time when India was under immense pressure from the US to devalue the
Rupee to safe-guard the aid received by India from the US. This led to the Rupee being devalued to 1 USD=7
INR. The then members of parliament, Mr. Krishnamachari & Mr.Kamraj opposed the weak Rupee policy but
Mrs. Gandhi did not relent, being mindful of the countryâs dependence on aid from the US.
⢠The strong dollar period of 1980s
After 1970, USD grew stronger against the Rupee under the incompetence of Indian politics coupled with
robust economic growth in the US. The exchange rate in 1970 was 1 USD= 7.47 INR, which rose to 1
USD=8.4 INR in 1975, after the political uncertainty following the assassination of Mrs. Gandhi in 1984.
The next round of weakness in the Rupee came in the wake of the Bofors scam which toppled Rajiv
Gandhiâs government plunging the Rupee to new lows of 1 USD= 12.36 INR in the year 1985. In the year
1990 this rose to 1 USD =17.5 INR.
6. ⢠Devaluation after the economic liberalization of 1991
The economic liberalization in 1991 under the prime minister-ship of Narsimha Rao brought with it a
sharp devaluation of the Rupee. At that time the Indian Forex reserve dropped to multi-year lows and a
point came when India had only enough forex to be able to pay for 3 months of Import bills! To fill in this
gap India borrowed large amounts from the International Monetary Fundâs (IMF) with an obligation to
devalue the Rupee. The Rupee hit new lows with 1 US$ = 24.58 INR by the early-nineties from Rs.16.31/1
USD towards the end of the previous decade. The low Rupee policy came as a boom for exporters including
the Information Technology industry, which was in its infancy at the time.
7. Revaluation
⢠In the period 2000â2007, the
Rupee stopped declining and
stabilized ranging between 1
USD = INR 44â48
⢠In 2007, the Indian Rupee
reached a record high of Rs.39
per USD, on account of
sustained foreign investment
flows into the country.
8. But revaluation was not for a long time
⢠The trend has reversed lately with the 2008 world financial crisis
as Foreign investors transferred huge sums out to their own
countries.
⢠2013 - True, India did not suffer much - in the sense that the
banking industry was much more stable than in the US. But the
market abroad was shaken -decreasing our exports. The major
imports for India is crude oil, manufactured goods and minerals -
and due to local demand of the population, these did not decrease.
So exports decreased but demand didn't (it probably increased due
to increase in population) again increasing the trade deficit
9. How the value of currency rate is determined
⢠Economics is governed by fundamental laws of demand and supply.
⢠If the demand of particular currency > its supply
than its value will increase.
⢠Consider an example:
You want to import something from US. For this you would need $. And
currently you have Rs. So you go to the Foreign Exchange Market to
exchange Rs and $ (giving Rs in return of $). But you are not alone!
There are many people who are demanding dollars for rupee. So this
leads to increase in value of dollar.
11. Reasons behind its fall
⢠Current Account Deficit (CAD)
⢠Strengthening of dollar
⢠Insufficient inflow of FDIs and outflow of the foreign investments
⢠Rising imports
⢠High inflation
⢠Trade deficit
⢠Low forex reserves
12. Low Forex Reserves
⢠Foreign-exchange reserves are assets held by central banks and monetary
authorities, usually in different reserve currencies, mostly the United States
dollar, and to a lesser extent the Euro, the Pound sterling, and the Japanese yen
etc.
⢠Suppose due to some reasons ,the exchange rate reaches below Rs. 50 per
dollar. The RBI will then step in the market and will offer Rs. 50 for each dollar.
Those buying rupees against dollar will now purchase from RBI since its
offering better rate. Soon other traders will have to arrive at this rate, if they
want to participate. Since RBI has the ability to print currency 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.
⢠Now in case of opposite,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 depreciation of
rupee but it demands dollars and thus leads to decrease in forex reserves.
13. Currrent Account Deficit(CAD)
Balance of Trade(Exports-Imports)
Net Factor Income(earnings on foreign
investments-payments made on foreign
investors)
Net cash transfers(eg.remittances)
14. Capital Account
Foreign
ownership
of domestic
assests
Domestic
ownership
of foreign
assests
Capital
Account
15. Strengthening of Dollar
⢠In the last six months the dollar has strengthened by 3.52 percent with the strengthening of
the US economy. The dollar has been rising on signs of growing economic momentum . This is
something which is beyond the control of the Indian Government and it is hampering the recovery
of the rupee.
16. Insufficient inflow of FDIs and outflow of the
foreign investments
⢠The downfall in the Indian economy has worsened the situation and the government is
unable to generate heavy capital inflows. Despite all the government effort to allow Foreign
Direct Investment(FDI), there hasnât been significant FDI inflow. The US federation has
withdrawn some of its bond buying programmes, resulting in a sudden outflow of money that in
return has left India far behind in the race.Foreign investors has been pulling out of the Indian
economy. The month of May has seen a record outflow of foreign investments of Rs. 44162 crore.
With the giants like Posco pulling out of its Rs. 300project in Karnataka followed by
ArcelorMittal pulling out of its Rs. 50,000 crore project in O00 crore steel plant disha due to
delays and land acquisition delays. This has shrunk the total inflow of capital in India. Indian
investors have been spending more abroad than foreign investors have been spending in India.
This has led to the further deficit of current account.
17. Rising Imports
⢠The rising import bill is one of major concern and it has hindered the governmentâs effort to
tackle the falling rupee. Oil accounts for 35% of the total imports and gold 11% on Indiaâs current
bill. There has been a heavy demand for the greenback from the exporters of oil, the most prolific
buyers of dollar in the world market, thus pushing rupee lower. In the gulf countries, the dealing
of oil is done in dollars, i.e, if India has to purchase oil, it has to pay in dollars, so for this India
needs to purchase dollars from USA in exchange of rupee. This has led to the further devaluation
of the rupee.
18. Poor Economic Growth
⢠The Gross Domestic Product (GDP) growth has hit its lowest patch in the last 10 years. With fall
of the GDP growth to 4.8%, it had significant effect on the stock markets and the falling rupee. The
manufacturing, mining and the agricultural sector has faltered and investors have become
cautious of investing in India.
19. Inflation
⢠As we all know inflation refers to hike in prices. In this scenario, most foreigners as well as
Indians tend to take money abroad, or keep it away from India.
⢠Example :
Consider this: suppose you have Rs 100, and a chocolate costs Rs 10. So you can buy 10 of these.
Say the price increases to 20. Now you can buy only 5! Thus the value of Rs 100 has decreased! So
you would prefer keeping Rs 100 abroad and bring it in when you know that the value of Rs 100
would be more!
21. Tourism
⢠What effect devaluation has on tourism??
⢠It increases, but why?
⢠As the rupee devaluates the foreignerâs coming to India will have more
Indian currency in hand and the trip will become cheaper for them.
⢠So devaluation of rupee favours Indian tourism.
⢠But it also leds to decrease in no of foreign trips by Indians. As the
devaluating rupee makes it more and more expensive for them.
23. Export
⢠Exports increase.
⢠Why?
⢠Because with devaluation of rupee the cost of goods decreases for
foreigners.
24. Effect On Rupee depreciates Rupee appreciates
Importers Imports become costlier and
hence importers lose
Imports become cheaper and
hence importers gain
Exporters Realization from exports
increase and hence exporters
gain
Fall in export realization to the
extent of forex difference and
hence exporters lose
Foreign travel Trip becomes costlier Trip becomes cheaper
25. Foreign Investment
⢠As the rupee keeps on devaluating the foreign investor loose a
significant amount of money.
⢠Due to this most of the investors fear while investing in indian market.
⢠Also many investors are pulling out there money from indian markets.
26. G.D.P.
⢠As the rupee keeps on devaluating the foreign investors will hesitate in
investing in India and it will hence decrease the GDP of India.
⢠Another reason for decrease in G.D.P. is that G.D.P. is calculated in dollar
and as rupee devaluates so the G.D.P. will also decrease.
27. Increase in fiscal burden
⢠The central government fiscal burden might increase as the hike in the prices
of imported crude oil and fertilizer might warrant for a higher subsidy
provision to be made for these commodities.
⢠However govt. has decreased the fiscal burden due to diesel subsidies.And it
is planning to further decrease it to null.
28. Why Dollar is used to determine the value of
currency??
⢠This is because 80% of the
worldâs transactions take place in
US Dollar.
⢠The GDP of USA was approx. 15
trillion in 2012 while that of India
was just 1.5 trillion.This may be
the easiest way to realize why
USD is considered most
favourable currency.
29. Remedies by govt till date
⢠A planned increase in import duty has been exercised to shore up the
decrement in rupee. The customs duty on several red-hot imports like
gold and silver is on the rise, itâs a strategic move by the central
government to ease the gap between dollar and rupee.
⢠Government is also considering increasing its import of crude oil from
Iran, and pay for it directly in Indian rupees.
⢠Ministry of Commerce is exploring the possibility of using local currency for
trade with major trading partners.
30. ⢠RBI increased the current overseas borrowing limit for banks from 50% to
100%, and allowed it to be converted into rupees and hedged with the RBI
at concessional rate.
⢠The central government has unraveled a multipronged strategy to bring
about an increment in the inflow of dollars and limit the outflow to
compensate for the sliding value of rupee.
32. Further Remedies that can help if implemented
⢠NRI bank deposits can be made more attractive and foreign loan norms eased.
⢠Electronic goods top the list when it comes to making big business. In order to stabilize rupee a
significant increase in customs duty on Electronic goods needs to be exercised.
⢠Govt. should invest in researches than can find an alternative to oil which is the highest contributor to
increase in import.
⢠Their should be a limit on the imports of luxury products.
⢠Promote aggressively exports of manufactured goods like China.
33. How a student can support our devaluated
currency??
⢠Student can spread awareness through social media and other means.
⢠They can educate people about the condition of rupee.
⢠They can promote use of Indian goods as far as possible.
34. Conclusion
⢠Todayâs scenario presents that even after some steps taken by govt. their
is no stabilization in value of rupee.
⢠So, govt. should work on further remedies.
⢠General public should also support govt. in decreasing imports i.e.
âSpirit of Sacrifice by the Peopleâ.