This presentation is about Money Inflation, i.e. the loss of value of a country's currency with respect to one or more foreign reference currencies.

1. A presentation byAditi Soni
Anushka Sinha

2. INTRODUCTION
Money inflation is the loss of value of a country's currency with
respect to one or more foreign reference currencies, typically in
a floating exchange rate system. A floating exchange rate or
fluctuating exchange rate is a type of exchange rate regime
wherein a currency's value is allowed to fluctuate according to
the foreign exchange market.

3. FLUCTUATION IN INR COMPARED
TO DOLLAR AND EURO
INR to USD
62.00
INR to EURO
61.12
59.70
56.50
58.00
56.00
54.00
53.29
53.77
54.39
54.22
52.00
50.00
48.00
Months
Exchange rate
Exchange rate
60.00
82.00
80.00
78.00
76.00
74.00 72.23
72.00
70.00
68.00
66.00
64.00
62.00
80.95
77.98
73.68
70.68
70.98
69.54
Months
The Indian Rupee has depreciated significantly against the
US Dollar marking a new risk for Indian economy.
The rupee touched an all-time low of Rs 61.17 /$ on 31 July
2013, breaching its previous historic low of Rs 59.98/1$ of
2008. At the end of day it was Rs 61.12/1$.

4. CAUSES

5. Huge Trade Deficits
Since India imports more goods
(in value terms) than it exports, it
results in a huge imbalance in
trade, or what is called a trade
deficit.
Trade deficit has widened by
40,000 crores in the last quarter.
This has resulted in increased
imports and spike in dollar
demand.
India recorded a trade deficit of
10,556.10 USD million in October
2013.

6. Lower Capital Inflows
•Although
India has become an
attractive destination which
can attract foreign capital as
well as money from nonresident citizens, it is not
enough to make up for the
trade deficit.
•Uncertainty
about India's
commitment to economic
reforms, retrospective
taxes, and policy paralysis
within the government have
forced foreigners to either
postpone their investment
decisions, or take money out of
Indian stock markets.

7. Devaluation Pressure
In
such a situation, more
people tend to sell rupees to
buy dollars.
Importers scamper for dollars
to cater for their needs to buy
goods abroad.
Exporters cannot bring in
enough dollars; in fact, they
keep their foreign earnings
abroad as they expect the rupee
to fall further.
Meanwhile, foreign investors
increase the demand for dollars
as they convert their rupee
assets into dollars to take their
money out.
This demand-supply gap
between the dollar and the
rupee leads to devaluation.

8. Low Growth and Inflation
Annual
economic growth of 6% in
2012-13.
Couple this with high inflation due to
high food and fuel prices. The rate of
inflation may rise this year to double
digits if the government is unable to
curb its fiscal deficit.
In this scenario, most foreigners as
well as Indians tend to take money
abroad, or keep it away from India.
Global investors are also nervous
about investing abroad in nations such
as India due to the economic crisis in
their respective countries.

9. Rupee Speculation
The
Reserve Bank of India's
bid to sell dollars in the open
market to restrict the rupee
slide has failed in the past few
weeks and months.
This has complicated the
situation further.
Once currency traders and
speculators realize that India's
central bank is unable to
manage its exchange rate, and
reduce the adverse impact on its
currency, they may enter the
market in a big way to sell the
rupee.
As a result, the rupee may
devalue more than it should.

10. IMPACTS

11. Impact On Importers
Depreciating rupee will have an
adverse effect on import because
now import companies are
supposed to pay higher prices for
.
importing the goods or services.
Importers have to make the
payment in terms of dollars for
importing any good or
service, which makes import an
expensive affair.


12. Impact On Employment
Diminishing
rupee will
adversely affect job market
as well. Companies dealing
in various sectors like
manufacturing, power, oil
and gas, automotive
sectors, electronics, telecom
munications might slow
down their hiring process to
cope up with the high import
prices of equipment and
machineries. There is
anticipation that employees
will not see any hike in their
salaries.

13. Impact on Sales
Depreciating
rupee will
show its adverse effect on
sales also. Prices of midrange and low-range
electronics are expected to
rise because of their major
parts being imported.
Supply of electronics in
India is greater than
demand; many companies
will suffer under such
circumstances. On the
contrary, handset
manufacturers of India can
earn a lot of profit by
exporting mobile parts to
developed countries.

14. Impact on IT Industry
At
such a time, when all
the other industries are
going to badly suffer due
to the fall in rupee, IT
industries will earn profit
with falling rupee. Indiabased IT companies are
expected to earn a huge
margin if currency
remains depreciated for a
long time. But it is yet to
be seen, for how long this
process continues.

15. Impact on Exports
Export
oriented
companies such as
software companies, textile
companies; tourism
companies will earn huge
margins by exporting their
good and services to
overseas clients.
 Depreciating currency
will provide the best
opportunity to export
driven companies as they
can earn a huge profit for
themselves during this
period.

16. MEASURES

17. Measures that should be taken by RBI
RBI
should sell forex
reserves and buy rupees in an
immediate action in order to
arrest the further decline in
the value of rupees.
Hiking
the interest rates to
reduce the money supply in
the economy.
Making
investments
attractive –Easing Capital
Control by increasing the FII
limit on investment in
government and corporate
debt instruments and
introduce higher ceilings in
ECB’s.

18. Measures to control Current Account Deficit
The
first set of measures should
include a careful evaluation of the
import tariff structure and
increase it wherever such levels
are lower than WTO
requirement.
Curb on Import of non essential
& unproductive products by
imposing higher taxes.
To reduce import we should
bring in import substitution by
supporting the domestic
organizations by providing
subsidy, tax benefits, grants and
proper Infrastructure.
Subsidy on import products
such as oil should be
discontinued.

19. Measures to increase foreign capital inflows
Government
can create a stable
political and economic
environment. Providing
infrastructure and local support to
the investors is
another, admittedly more difficult
avenue that can be explored in this
regard.
One of the measures being looked
at is allocating a separate quota for
sovereign wealth funds (SWF) in
PSU divestment issues. This
reservation could be as high as 30
percent.
Making government bonds
available to non-resident investors
will also increase the inflow of
dollars in to the country.

20. CONCLUSION
The value of the rupee in terms of dollars will depend over time on
the erosion of its value in terms of purchasing power internally. If
inflation has been at say, 7 percent, the rupee will have to fall to
that extent unless the importing countries are themselves victims
of inflation. That is not the case. Hence, the rupee has fallen the
most compared to other currencies because India has had a very
high rate of inflation. Eventually, the rupee will stabilize, barring
short-term disturbances, after correcting the loss in its domestic
purchasing power.