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Devaluation of Indian Currency in August 2013
2. AN OVERVIEW
Each country has its own currency except Europe and the rate at which one
currency can be exchanged for the other is called forex rate.
This rate changes on daily basis depending on the demand and the supply of
each currency.
A currency is said to have appreciated against the other currency when we
had to pay less units of former currency in exchange of one unit of the other.
Similarly, a currency is said to have depreciated against the other currency
when we had to pay more units of former currency in exchange of one unit
of the other.
3. Indian Rupees: Background
Here is a broader look at the Indian rupee's journey since 1947:
- India got freedom from British rule on Aug 15, 1947. At that time the
Indian rupee was linked to the British pound and its value was at par with
the American dollar. There was no foreign borrowings on India's balance
sheet.
- To finance welfare and development activities, especially with the
introduction of the Five-Year Plan in 1951, the government started external
borrowings. This required the devaluation of the rupee.
- After independence, Indian choose to adopt a fixed rate currency regime.
The rupee was pegged at 4.79 against a dollar between 1948 and 1966.
- Two consecutive wars, one with China in 1962 and another one with
Pakistan in 1965, resulted in a huge deficit on India's budget, forcing the
government to devalue the currency to 7.57 against the dollar.
- The rupee's link with the British currency was broken in 1971 and it was
linked directly to the US dollar.
4. Indian Rupees: Background
- In 1975, the Indian rupee was linked to a basket of three currencies
comprising the US dollar, the Japanese yen and the German mark. The
value of the Indian rupee was pegged at 8.39 against a dollar.
- In 1985 it was further devalued to 12 against a dollar.
- India faced a serious balance of payment crisis in 1991 and was forced to
sharply devalue its currency. The country was in the grip of high
inflation, low growth and the foreign reserves were not even worth to meet
three weeks of imports. Under these situation, the currency was devalued to
17.90 against a dollar.
- The year 1993 is very important in Indian currency history. It was in this
year when the currency was let free to flow with the market sentiments.
5. Indian Rupees: Background
The exchange rate was freed to be determined by the market, with
provisions of intervention by the central bank under the situation of extreme
volatility. In 1993, one was required to pay Rs.31.37 to get a dollar.
- The rupee traded in the range of 40-50 between 2000-2010. It was mostly
at around 45 against a dollar. It touched a high of 39 in 2007. The Indian
currency has gradually depreciated since the global 2008 economic crisis as
foreign investors transferred huge sums out to their own countries .
Such appreciations were reflected in many currencies, e.g. the British
Pound, which had gained value against the dollar and then has lost value
again with the recession of 2008.
Former finance minister Manmohan Singh, who is now the prime
minister, was instrumental in liberalising the currency regime. The move led
to a sharp jump in foreign investment inflows and boosted the economic
growth.
- Then in 2013 $ 1 almost reached a rate of 60 rupees.
6. Current Scenario
Rupee has depreciated over 16.50 percent in past three
months.
The Indian rupee, which was at par with the American
currency at the time of independence in 1947, hit a
record low of 61.80 against the dollar recently. This
means the Indian currency has depreciated by almost
62 times against the greenback in the past 66 years.
The Rupee crossed the 65 mark against the US dollar
on Wednesday 21st August,2013 with its impact being
felt across the board.
7. Current Scenario
The currency has witnessed a large volatility in the past
two years. This volatility became acute in the past three
months affecting major macro-economic data, including
growth, inflation, trade and investment.
For the common man the immediate pain is due to an
increase in home loan rates by ICICI Bank and
HDFC, which will increase the burden of equated monthly
installments.
8. Why Did The Rupees Crash?
RBI’S capital controls triggered panic that FIIS may be blocked from
exiting.
Asian currencies crashed on expectation that US Fed will taper off
bond buying from September.
FIIs have sold $11.3bn worth of bonds and equities since May 22.
Moody’s downgrade of three public sector banks turned sentiment
negative.
Dealers fear that RBI may not have enough reserves to support
currency.
India’s current account deficit of 4.8% is largest among emerging
markets.
9. 1991 vs 2013
India Then And Now
What is similar?
Both the crisis is preceded fiscal profligacy, high
consumption and high imports
Current account deficit is high (3% in 1991 and 4.8% in
2013) as exports turn uncompetitive
High fiscal deficit in both cases-5.39% in 1991 and
4.9% in 2013
Absence of reforms- India story missing
GDP growth at 5.3% in 1991 and 5% in 2013
10. 1991 vs 2013
IndiaisThen And Now
What different?
FY 91
The external debt to
GDP ratio was 28.7%
Currency overvalued
20% in terms of purchasing
power
India domestic savings
at 31%
Indian economy driven
by manufacturing
Reserves enough to cover
two months of imports
FY 13
The ratio stands at 20%
Currency undervalued by over
India domestic savings at 20%
Indian economy driven by
services sector
Well developed, deep and
diversified financial services
11. Why Indian Rupee Is A Cause Of
Concern?
Current Account Deficit will widen.
Companies with $ debt to come under stress
More curbs on imports-particularly electronics-expected
General inflation to go up due to costlier inputs, consumer
goods and fuel
Demand will fall further due to inflation and thus
corporate profit margin may fall
Lending rates may rise before festival season
Foreign studies and holidays will pinch more
Rate cut to stimulate economy will be difficult
Weak rupee to draw more solo tourists and backpayers to
India.
13. What Can RBI And
Government Do?
Keep volatility under check through curbs on
speculation and intervention.
Remove roadblocks to foreign direct investment
proposals.
Place restrictions on import of electronics like
smartphones.
Give temporary incentives to foreign investors to
draw in forex.
14. Remedies
Renowned currency strategists have opined that unless measures are
announced by the Govt. and RBI, rupee may see even 62-62.5 in the near
term. The Govt. has lined up a spate of decisions as part of campaign of
reform aimed at lifting the economy out of its worst slump in the decade.
The following are the reforms on the agenda: Relaxations in the FDI limits in many sectors
Setting up of an independent tariff authority for the railways
Regulator for roads
Launching of new financial instruments to attract sovereign wealth funds
Setting up the pace of allocation of gas to fuel-starved plants
Allocation of coal blocks
Implementation of fertilizer policy.
Despite framing such agendas to be undertaken, the success of any
economy lies in the ability of the Govt. in implementing the policies in an