This presentation gives a brief outlook of the factors, causes and impact of Rupee depreciation.

1. Rupee
Depreciation
By
V.Chaitanya Lakshmi

2. Contents
 Factors
 Impact
 Suggestions

3. Balance of Payments

4.  Current Account Deficit: If total inflows in the country (its
export, remittances and earning from its investments abroad) is
less than its outflows (its import, remittances out of the
country, payments of interests etc.)
 India recorded a Current Account deficit of 21.80 USD Billion
in the second quarter of 2013
 Capital Account :This records all the flow (into or out of the
country) made for future return –FII or FDI. It also includes
loans taken from abroad (which actually is investment by
foreign lender into the nation
 A country is said to be in Capital account surplus if total
inflows into the country (FII, FDI and borrowing from foreign
companies/banks) exceeds total outflows (investments into
foreign countries and lending to foreign countries or
companies). In case situation is reversed, country has capital
account deficit.

5. Trade deficit & Fiscal deficit
 If Exports of a country > Imports of the country then it
is called trade deficit.
 India recorded a trade deficit of 430.98 INR Billion in
September of 2013
 If government's total expenditures is more than the
revenue that it generates then it is called Fiscal deficit

6. High imports

7. Demand & supply of currency
 When a country imports more are more than exports, it
means it is paying more than it is making in terms of the
currency in which it is trading. (paying more dollars than
we are making)
 This difference to be paid in terms of foreign currency has
to be purchased from the market where the basic principles
of demand and supply determine the price of the currency
 It means that the foreign exchange market has an excess
supply of rupees and a shortfall of dollars, causing the
country’s currency to depreciate as demand of its currency
decreases. This leads to the rupee losing value against the
dollar

8.  We pay dollars for importing oil and gold, The
government of India subsidizes the prices of
diesel,LPG , kerosene, etc.
 This means that the oil companies have to sell these
products at a loss, to the consumer. The government in
turn compensates these companies for the loss. This
leads to the expenditure of the government going up
and
hence
it
incurs
a
higher
fiscal
deficit(government's total expenditures exceed the
revenue that it generates).

9. Rupee losing
value(Rupee
depreciation)
Higher trade
deficit
Indian co’s have
to pay more/per
barrel of oil in
rupees
Higher fiscal
deficit
Higher oil bill
Increased
subsidy on the
govt

10. Capital Inflows
 Movement of capital into a
market or economy
Capital inflows  Currency
appreciation
Capital outflows Currency
Depreciation

11. FII and FDI
 FII is when foreign investors invest in the shares of a
company that is listed in India, or in bonds offered by
an Indian company.
For ex: If a foreign investor buys shares in Infosys then
that qualifies as FII Investment.
 FDI is when a foreign company invests in India directly
by setting up a wholly owned subsidiary or getting into
a joint venture, and conducting their business in
India.IBM India is a wholly owned subsidiary of IBM

12.  The uncertainty & delay in our
commitment
to
economic
reforms, retrospective taxes, and
policy paralysis within the government
have created a fear in mind set of
global investor resulting into decline
of foreign Investment.
 The loss in value of the Indian
currency has further accentuated FIIs
withdrawals.
 Flaws
in
foreign
currency
management of India, it attracted
investments of FII rather than that of
FDI.
 FII’s are taking their investments out
of the Indian markets, it has led to an
increased demand for dollars, further
leading to a spiraling rupee.

13. Interest rates
 Uncontrolled money borrowing from abroad.
 The interest rate for the loan from abroad is less.Central
government allowed industrialists to take huge sum of loans
from abroad
 Industrialists took loans in foreign currencies at cheap rates (
$100m @ Rs40, 2008 rates) and when they have to repay in
say 2013 then, $100 m @ Rs 62 is very expensive. Hence a
loss for Indian companies.
 When industrialists accumulate money from Indian markets for
the repayments, the demand of Dollar is getting increased
further and which will cause the decline the value of Rupee

14. Inflation
 High inflation in a country
impacts the country’s
exports as goods become
expensive for other
countries resulting
decreased exports, leading
to decrease in demand for
currency and depreciating
currency value.
 Infrastructure: lack of
proper infrastructure in
India
 Daily meals becoming
costlier with inflation

15. Forex reserves
 The fundamental driving the
rupee movement is ultimately
the change in foreign exchange
reserves - decline in the forex
reserves would result in
depreciation of the currency.
Foreign currency assets after
increasing in the months of
March and April 2013 declined
to $ 258.50 billion in May 2013
 The RBI can directly intervene
in the forex market to curb
falling exchange rate through
dollar selling.

16. Speculation
 The fall in rupee can be largely attributed to the
speculations prevailing in the markets.
 Due to a sharp increase in the dollar rates, importers
suddenly started gasping for dollars in order to hedge their
position, which led to an increased demand for dollars.
 On the other hand exporters kept on holding their dollar
reserves, speculating that the rupee will fall further in
future. This interplay between the two forces further
fuelled the demand for dollars while sequestering its
supply from the market. This further led to the fall in
rupee.

17. Market sentiments
 During turbulent markets, investors usually prefer to park
their money in safe havens such as US treasuries, Swiss
franc, gold and so on to avoid losses to their portfolios.
This flight to safety would lead to foreign investors
redeeming their investments from India. This could
increase the demand for dollar vis-à-vis Indian rupees.
 Policy inaction: Perception of lack of clarity on the policy
front is also fanning speculative demand wherein the
Reserve Bank of India (RBI) on one day said it will
tighten liquidity and on yet another said it will inject $1
billion in the market.

18. Global factors
 Euro zone crisis had lead to fall in exports in India
 Recession in developed countries like US made big institutions
to pull out their money
 European Union (EU) is the biggest partner of India in the
foreign trading sector. India, more than any other countries,
has been depending EU for the investments. Therefore, it is
quiet natural that the recession and crisis connected with EU
will adversely impact India.
 Dollar is getting stronger against all other currencies of the
world. This is also another reason for the plight of Rupee. The
shadow of global recession is moved away and the situation in
America, even in employment sector, is getting improved
nowadays.
This is the secret behind the strength of
Dollar,besides the issues in Japan and Euro zone are still going
on. Therefore, Dollar, like gold, became the most secured
investment method.
In the global money market, the
investments in Euro and other currencies have been shifted to
Dollar.

19. US tampering the stimulus
US Fed has shown signs to end
their stimulus. Hence, making the
US dollar stronger against the
other currencies including the
Indian rupee, at least in the short
term. One doesn’t really know
when Helicopter Ben will shut the
door and stop the printing of
money, though one doubts
whether the door will be shut
anytime soon.

20. Political factors

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Political instability
Delay in implementation of policies
Delay in sanctioning budget
Biased decisions for the sake of winning elections(Food
security bill)
 The value of Rupee is adversely impacted even by the
uncontrolled subsidies given to the super industrialists. If
the authorities are reluctant in solving these issues, it will
be more serious crises that are going to overwhelm the
country
 lack of reforms and policy paralysis
 Scandals & Corruption

21. Impact
 Increase in Inflation, Fuel price: A weak rupee will increase the
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burden of Oil Marketing Companies (OMCs) and this will surely be
passed on to the consumers as the companies are allowed to do so
following deregulation of petrol and partial deregulation of diesel. If
the OMCs increase fuel prices, there will be a substantial increase in
overall cost of transportation which will stoke up inflation.
Increase in the cost of education
Economic slowdown and job loss
Loan rates go up
Importers sells rupees and buy dollars, high purchase of dollars more
depreciation in rupee
Imported goods: Buying imported stuff will become a very costly
affair. You will have to shell out extra on imported goods.

24. Suggestions
 Exports should be encouraged
 Imports of all non-essential items should be imposed with high
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import duties
Create a conducive environment for manufacturing and
infrastructure
Capital controls implemented should be removed and free trade
environment should be created
Gold lying in the lockers of Indians should be brought out by
introducing attractive schemes and should be used for
investment
Exporters Should Buy Rupees
Moral Influence
Delay Import Payments

25.  To Provide Oil Bonds
 Review limits for foreign investment
 Opting for currency swaps and batter exchanges with
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friendly nations like Japan and Iran on both sides of our
country
Speedy approval to over 100 coal mines that are awaiting
environmental clearances
Implement a commercially viable gas price policy to
maximize gas output within the country
Have proper crop planning so that surplus produce don’t
get rot
Transparency between the central bank and the markets

26. Queries….???