The document discusses the causes and effects of the weakening Indian rupee. It traces the historical exchange rate between the rupee and US dollar from 1947 to present. Key causes of the rupee's weakening include India's dependence on crude oil imports, gold imports, fiscal and current account deficits, the European debt crisis, and weak economic fundamentals. Effects include higher gold and fuel prices, increased education costs for students abroad, benefits for exporters, and increased borrowing costs. A weak rupee impacts many sectors of the Indian economy.

1. Weakening
Rupee : Its
causes and
Effects

2. Relationship between Indian Rupee
and US Dollar
• 1947 – When India achieved independence there was no external borrowings on the
India’s balance sheet. The exchange rate on 15th august 1947 was 1US$ = 1 INR.
With the introduction of 5 yrs plans , Indian government needed foreign borrowing
and this led to starting of devaluation of rupee. The trend continued during the Indo-
China war of 1962 and Indo-Pakistan war of 1965 which further forced the
government to devaluate the rupee as the country was in need of weapons.
• 1970’s - This was the time when India was under immense pressure by the US
government to devaluate the value of Rupee so that the aid received by us
government remains continue. In this time the Rupee got devaluated to 1USD=7
INR. The India was totally dependent on the aid given by the US that time.

3. • 1980’s – “ The strong Dollar Period”. In 1980’s USD grow stronger against the
rupees under the incompetence of Indian politics coupled with robust economic
growth in the US. The exchange rate in 1975 was 1USD=7.5INR and it increased
to 1USD = 9.5INR in 1981. The next round of weakness came in rupees after the
the death of Rajiv gandhi and there was political uncertainity in the Indian
Economy. Then the BOFORS scam took place which led a huge loss to the
Indian Economy and that time the value of Indian rupee reached to 13.5INR
against 1 Dollor. In year 1990 it rosed to 17.5 INR against 1 Dollar.
• 1991 – After the economic liberalization in 1991 under the prime minister-ship
of Narsimha Rao the rupee reached its lowest . It reached at 25.60INR=1USD.
At that time India borrowed large amount of funds from the IMF (International
Monetory’s Fund) , but at this time many MNC’s was at their infant stage they
took the advantage of the situation. It sector was emerging that time and
devaluation of rupee helped them to establish a good market in India.

4. Causes :-
1) Import of crude oil - Each year the country spends nearly 140 billion dollars
on import of crude oil, which means with depreciation of rupee by 25 per cent,
the country would be shedding more for its imports of crude oil, which is price
inelastic
2) Gold imports: Gold imports hit 162 tones in June, twice the monthly average
of 2011 when they reached a record. Gold is the second most expensive import
for the country after crude oil. India's current account deficit was equivalent to a
record 6.7 per cent of gross domestic product in December 2012.
3) Fiscal deficit - Fiscal deficit of a country is an important factor that drives the
currency of that nation. Higher deficit means the government will have to pay
more and also print more rupee notes. This would result in excess supply of rupee
in the market, leading to inflation and reduction in its value. Similarly, current
account deficit (CAD), which represents the net of import and export, results in
more obligations for the country to make its payments in foreign currency.

5. 4) Europe Crisis : The fact that Euro Zone is in crisis , people are more interested
in dollars and they are doing more business with US. Europe crisis is also
making more pressure on the Indian rupee as a result the Indian government has
to import more form US then Europe. The europe currency was at its lowest in
June,2013 which led to more pressure on the Indian current accounts and Balance
of payments. This devalued the Indian Rupee and Rupee start falling .
5) Slow Debt-coverage – The Indian companies who are operating worldwide and
they are lending loans to the people outside the nation are also suffering losses
because they are not able to recover their given loans. This has caused the
blockage in the money supply . Recovering the debt from the different countries
is a major task these days for the Indian companies.
6) Weak economic fundamentals: Economist says that weak economy and no
signs of a quick fix solution are weighing on the rupee. The UPA government is
unlikely to deliver far reaching reforms to generate heavy capital inflows, as it
did last December to stave off the loss of India's investment grade credit rating.

6. Effects -
1) Gold prices: A weakening rupee is supportive for gold. That's because global
commodities such as gold and silver are priced in dollars. Gold prices, which
are down nearly 15 per cent (in rupee terms) in 2013, may trade in a range.
2) Petrol, diesel prices: Crude is the biggest component of India's import bill. A
weak rupee is bad for the economy since oil companies, which pay for crude in
dollars, will have to shell our more money for importing oil. This will increase
India's current account deficit. The rupee weakness means there is little
likelihood of a respite from high fuel prices, but because global commodity
prices have been falling, there's no imminent threat of a price hike either.
3) The rupee weakness is a bad news for students going to study abroad as they
will have to shell out more towards their fee and living expenses. Similarly,
Indian tourists going abroad will have fewer dollars to spend because of the
rupee weakness.

7. 4) Exporters such as IT firms, which earn a majority of revenues in dollars, will gain
from the rupee weakness. Companies like Infosys get over 75 per cent of their
business from North America and Europe so a weak currency is beneficial for them.
5) The rupee weakness is bad news for investors, especially foreign funds. A weak
rupee also dents corporate profits (especially for companies that import raw
materials) and makes it expensive to borrow from abroad.
6) Companies which export goods and services to the US are the main beneficiaries of
depreciation of the Indian rupee. They receive their revenue in US dollars whereas
their major expense is in the Indian rupee. With rupee depreciation, their rupee-
denominated revenue will continue to grow even though there is no change in
expense. Information Technology (IT) is one such sector, which receives more than
half of its revenue from the US.
7) The sectors that use heavy machineries usually import them from outside India.
These items are very expensive and require a huge amount of initial cash outflow.
Typically, companies borrow in foreign currency, also known as ECB (external
commercial borrowing) to finance their investments. The interest and principal
repayment is spread over several years. When the rupee depreciates, these
companies have to shell out more rupees to meet their payment obligations

8. Conclusion
Thus weak Rupee is affecting almost all the
sectors of the economy. Gradually with more
global linkages, effect of exchange rate
movements will be more acute on different
sectors. Therefore stability in exchange rate is
essential for stability in economy and this
stability will not be assured by buying and
selling of dollars by RBI but by stable growth
of both export and import based industries of
the country.