Effects and Causes of Depreciation of Indian Currency in comparison with US $

1. Prepared By:
Vikash Kr Gupta
BBA 1st year

2. CONTENTS
 Currency Appreciation and Depreciation
 Why don’t we need a depreciating INR?
 Exchange Rate or Conversion Rate
 The Negative Impact – Rupee Depreciation
 The Positive Impact – Rupee Depreciation
 Effect of depreciation of Rupee on Indian lifestyle
 Causes
 The Rope –That can pull INR out
 Is the India only loser?
 In a Nut Shell…

3. INTRODUCTION
Depreciation in rupee has become a big worry for the Indian
Government and breaking news for the news channels and
newspapers. Rupee has declined to its peak level in the month of
July, 2013 and is expected to continue in coming days.
Due to stagnant reforms, and declining foreign investment, rupee
started depreciating in the early 2013. As a result, the Indian Rupee
dropped to 68.80 per dollar.Various measures were announced by
the Government prior to this drop to prevent it from dropping
further. But, none managed to slow down the depreciation!
“Dollar on an escalator, rupee on a ventilator, nation in the ICU”, reads
one twitter joke!

4. CURRENCY APPRECIATION AND
DEPRECIATION
o Appreciation in any currency means when we exchange that
currency with another currency, we will get more foreign
currency or we need to pay less home country currency.
o On the other hand depreciation in a currency means when we
exchange that currency with another currency, we will get less
foreign currency or we need to pay more home country
currency.

5. o For example:
Few months back, 1 USD= INR 45 which means for each 1$, we
need to pay INR 45.While in current situation, 1USD= INR 60
which means for each 1$, we need to shell out INR 60.
Thus we need to pay more INR compared to previous situation.
Thus in this case, Rupee has depreciated and USD has
appreciated!

6. WHY DON’T WE NEED A DEPRECIATING INR?
 The persistent decline in rupee is a cause of concern.
Depreciation leads to imports becoming costlier which is a
worry for India as it meets most of its oil demand via imports.
 Apart from oil, prices of other imported commodities like
metals, gold etc will also rise pushing overall inflation higher.
Even if prices of global oil and commodities decline, the
Indian consumers might not benefit as depreciation will
negate the impact.

7.  The depreciating rupee will add further pressure on the
overall domestic inflation and since India is structurally an
import intensive country, as reflected in the high and
persistent current account deficits month after month, the
domestic costs will rise on account of rupee depreciation.
 Exchange rate risk also drives away foreign investors which in
turn depreciates the local currency. Indian Rupee is currently
caught in this vicious cycle; it will have to find a stable level to
regain investors’ confidence.

8.  The depreciating rupee has serious effects on the external
debt figures of the nation.The total external debt has
increased by Rs. 2186.8 billion to Rs 16384.9 billion by the end
of November 2011.

9. EXCHANGE RATE OR CONVERSION RATE
 Each country has its own currency and when we convert
currency of one country with that of another country, it is
called conversion rate or exchange rate between the two
countries.
 For example:
1USD= INR60 which means if we convert 1 USD in INR we will
get Rs.60.
 The conversion rate fluctuates on timely basis based on
various factors such as demand and supply of each currency,
inflation rate in country, interest rate prevailing in the country
etc.

10. THE NEGATIVE IMPACT – RUPEE
DEPRECIATION
 IMPORTERS
Importers will strongly feel the pinch of falling rupee as they will be forced to
pay more rupees on importing products.
IMPORTEDGOODS:
Buying imported stuff will become a very costly affair.You will have to shell
out extra on imported goods. For instance if you bought a product valued
USD 1, you paid around Rs 54 (months ago) but you will now have to shell
out close to Rs 68 for the same product.

11.  FUEL PRICE
A weak rupee will increase the 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.
TRANSPORTATION: If the OMCs increase fuel prices, there will
be a substantial increase in overall cost of transportation
which will stoke up inflation.

12.  STUDENTS STUDYING ABROAD
Students who are studying abroad will bear the brunt most owing to
depreciating rupee. Expenses incurred towards the university/college fee
as well as that of living will shoot up, thereby spelling a huge burden on
the students.
 TOURISM
The depreciating rupee will surely be a dampener if you are planning your
holiday abroad.Your travel charges as well as hotel charges will escalate
drastically, let alone shopping and other miscellaneous spending activity.

13. THE POSITIVE IMPACT – RUPEE
DEPRECIATION
 EXPORTERS
A feeble rupee will bring delight to the exporters as goods
exported abroad will fetch dollars which in return will
translate into more rupees.
COMPETITION: A weak rupee will make Indian produce more
competitive in global markets which will be fruitful for India's
exports.

14.  OVERSEAS INDIANS
‘Money saved is money earned.’
Depreciation of rupee is certainly a good news for the overseas
Indians.Those working abroad can gain more on remitting
money to their homeland.
 TOURISM
Travel and tourism is a sector which will benefit from the
depreciation of the rupee. If a tourist comes to India and the
rupee devaluates then it would become cheaper for him.

15.  IT FIRMS
 Despite a power crisis and political uncertainty, the IT sector
here has registered total revenues of Rs. 64,354 crore in
financial year (FY) 2012-13, as against Rs. 53,246 in FY11-12.
 The Rupee’s fall vis-à-vis the US dollar is set to ring in a
windfall for IT companies in the city and elsewhere in the
State – at least in the second quarter between July-
September. Industry observers say that the phenomenon
would benefit the companies at least in the short-term.

16.  “There are definitely going to be good results in the short-
term for IT companies. But, things will get difficult down the
line when the rupee fall continues and the cost of hiring IT
workforce and managing offshore operations increase,” feels
president of the Federation ofAndhra Pradesh Chambers and
Commerce Industry (FAPCCI) Srinivas Ayyadevara.
 Most IT companies in India service clients from US and
Europe.
 There is also the question of expense of staff working in US,
EU and other countries, which are based on US dollar, Euro
etc. So, everything is not that rosy,” feels IT’s AP’s secretary
Bipin Chandra Pendyala.

17.  Then there is the issue of companies facing tough times
because they import hi-tech equipment from US and Europe.
 “For such companies, depreciation hurts.We do buy good
amount of equipment including software, cameras, recorders
etc from USA and we end up paying lot more money. It’s hard
to pass this additional cost to our customers here in India as
they don’t like seeing additional incremental cost,” says
Vidteq.com founderT. Chandra Mohan Reddy.

19. EFFECT OF DEPRECIATION OF RUPEE
ON INDIAN LIFESTYLE
All eyes are riveted on the rupee right now,
when the focus should really be on inflation
stemming from the currency depreciation,
believes PRANAB SEN, chairman of the
National Statistics Commission.
What we need now is a tight monetary policy,
he told Neeraj Thakur.

20. EFFECT ON GROWTH
By and large , depreciation of currency actually good
for growth. However , it can lead to inflation and you
need to control it .
And therefore ,that suggestion that comes out is to
have a tight monetary policy.
But the fall in currency value is not helping growth.
Some suggests the use of foreign exchange reserves to
prop up the rupees.

21. EFFECT ON GROWTH
The rupee value is an effect not the cause.
The RBI has said “we are agnostic about any particular
level of rupees”.
We have done everything to control CAD opened up
various sectors to FDI , increased import duty on gold .
Still nothing seems to be working.
 Infact ,increase in import duties will not necessarily
help curb gold imports

22. Initially , due to inflation people start financing the
increased cost of living through their saving , which is
why it spoils over into CAD.
Industry specific reports offers insight into market size
and market share in India ; as well as industry trend in
each specific industry.

23. The consumer lifestyles in India reports examines
national lifestyle habits , ranging from health and
living standards income and earning patterns , eating
and drinking habbits , to home ownership trends.

24. Result of depreciation of rupees in
2012
The big story of 2012 was the sharp increase on taxes
across several states across in India that pushed us
retail price .
 Wine grew 10% in 2012 , in terms of total volume sales
.
Cider/perry continues to be insignificant in India .
Sales of alcoholic drinks in India grew by 9%.

25. Result of depreciation of rupees in
2012
 Homes & Gardens in India
Growth of the overall economy in India slowed in
2012 due to high inflation and more subdued
consumer spending.
The effected homes and gardens , as a result of
which growth in 2012 was at its lowest of the reviews
period .
However , in 2012 , ended on a positive note as
sales started showing signs of recovery in the last two
months of following the festival of Diwali .

26. Result of depreciation of rupees
in 2012
Premiumisation still a dominated theme.
Unbranded players dominated.
Home and garden specialist retailers the key
distribution channel.
100% FDI in single-branded retail and 51% FDI in
multi-branded retail expected to prove a boost to
home and gardens.
Strong growth expectation in the short term.

27. CAUSES
 BASIC LAWS OF ECONOMICS
 As per the rudimentary laws of economics if the demand for USD in India
exceeds its supply then its worth will go up and that of the INR will come
down in that respect. It may be that importers are the major entities who
are in need of the dollar for making their payments.
 Another possibility here could be that the Foreign Institutional Investors
are withdrawing their investments in the country and taking them
elsewhere.

28.  PRICE OF CRUDE OIL
The worth of crude oil has been a major bane for India since it
has to bring in the majority of its requirement from outside
the country.
The demand for oil in India has been going up every year and
this has led to the present situation.
 All over the world, the price of oil is given in dollars.

29. This implies that as and when the demand for oil increases in
India or there is an increase in oil prices in the global market,
there also arises a need for more dollars to pay the suppliers.
This also results in a situation where the worth of the INR
decreases significantly in comparison to the dollar.

30.  PERFORMANCE OF DOLLARWITH RESPECTTO OTHER
CURRENCIES
o The central banks across Japan and countries in the Euro zone
have been bringing out a lot of money and this has meant that
bothYen and Euro have lost their value.
o Compared to this the US Federal Reserve is giving hints that it
will end the fiscal stimulus so that the dollar becomes
stronger with respect to other currencies such as the Indian
Rupee at least for the time being.
o Till now in 2013, the US dollar index has become stronger by
1.91%.

31. o In an interview with the EconomicTimes, the CO-CIO of Birla
Sun Life Mutual Fund, Mahesh Patil has stated that the
increase in worth of USD is the major reason behind the
depreciation of the INR.
 VOLATILITY IN EQUITY MARKET
o The equity markets in India have been volatile for a certain
period of time.This has put the FIIs into a dilemma as to
whether they should be investing in India or not.

32.  In recent times their investments have touched an
unprecedented level and so if they pull out then the inflow will
go down as well.
 As per a report in BusinessToday, the international investors
in India have withdrawn to the tune of INR 44,162 crore during
June 2013 and this is a record amount.This has also created a
current account deficit (CAD) that is only increasing, thus
contributing significantly to the depreciation of the INR.

33.  EFFECTS OF EQUITY MARKET PROBLMS ON
INVESTORS
Now if the INR becomes weak then it will affect the investors
who are putting their money in India.
 CURRENT ACCOUNT DEFICIT
This situation arises when a country's' imports are more than its
exports. Due to which it needs to buy more foreign currency
to pay off the debts. Increase in the demand of foreign
currency will ultimately reduce the value of that country's
currency. India is facing a high current account deficit these
days which led to fall in rupee value.

34.  WITHDRAWAL OF INVESTORS
 Recently ArcelorMittal and Posco decided to pull out from their projects in
India. Posco did not go ahead with a steel plant worth INR 30,000 crore
that was supposed to be built in Karnataka andArcelorMittal withdrew
from setting up a steel plant in Odisha that was supposed to cost around
52,000 crore.
 There were lot of delays and problems related to acquiring land for the
project.
 In fact in 2012-13 the Indian companies have spent more outside India
compared to FIIs in India.

35.  DOWNGRADING OF INDIAN STOCKS
Goldman Sachs, one of the leading banks in the world, has rated
Indian stocks as being underweight. It has also asked
investors to be careful given the concerns surrounding the
recovery of the growth of Indian economy.
 INFLATION
It is one of most crucial factors in determining the currency
exchange rate.
We are experiencing very high inflation rate in India now.This
will decrease the purchasing power against other currencies
and will lead to depreciation of the Indian currency.

36.  CONTRACTION OF INDIAN ECONOMY
The various important sectors of Indian economy such as
manufacturing, mining and agriculture have seen poor growth
in 2013 and this has made them less appealing propositions
for the investors.
During June 2013, the aggregate industrial production in India
reduced by 2.2 per cent and in July 2013 the RBI predicted that
in the present fiscal there would be a growth of 5.5% which
was lesser than its previous prediction of 5.7%.

37.  FUTURE PROSPECTS OF INR
• In spite of all that has been said above it will be foolish to
write off the INR completely and say it shall not rise from the
mire.
• Experts are saying that the government needs to take some
short and medium term steps that will help the economy get
back on its feet yet again.
• It is only through continued efforts that the Indian
government will be able to retrieve the situation.
• However, it will take a Herculean effort to help the INR get
back to the 55 mark.

38.  POLITICAL PARALYSIS
In last few months, we have seen various corruption issues.
The parliament is not functioning properly due to which
several important Bills are pending.
The Government is not able to make any firm decisions
relating to investment and finance to attract investors.
Due to political paralysis in country, the investors have taken
a back seat which affected the inflow of funds and thereby led
to depreciation in rupee.

39.  CONDITION OF IMPORT BILL
 India’s import bill has been going up of late and most of this
can be attributed to gold.This has also hampered India’s
efforts to arrest the slide of the INR. Gold alone takes up more
than 10 per cent of India’s import bill – in April 2013, 141 tons
of gold were imported and it went up to 162 during May.
 The government took some measures that restricted gold
imports to 31 tons during June but once again in the first 25
days in July the imports went up to 45 tons.

40. THE ROPE – THAT CAN PULL INR OUT
MEASURES BY RBI:
1. USING FOREX RESERVES
 RBI can sell forex reserves and buy Indian Rupees leading
to demand for rupee. But using forex reserves poses risk
also, as using them up in large quantities to prevent
depreciation may result in a deterioration of confidence
in the economy's ability to meet even its short-term
external obligations.

41.  And not using reserves to prevent currency depreciation
poses the risk that the exchange rate will spiral out of control.
Since both outcomes are undesirable, the appropriate policy
response is to find a balance.
 Recent data shows that RBI had indeed intervened by selling
forex reserves selectively to support Rupee.

42. PERIOD FOREX RESERVES (In millions of USD)
2010-11 3,04,818
2011-12 2,94,398

43. 2. RAISING INTEREST RATES
The rationale is to prevent sudden capital outflows and
ultimately lead to higher capital inflows. But India’s interest
rates are already higher than most countries.This was done
to tame inflationary expectations. So further raising interest
rates would lead to lower growth levels

44. 3. MAKE INVESTMENTSATTRACTIVE- EASING CAPITAL
CONTROLS
 RBI can take steps to increase the supply of foreign currency
by expanding market participation to support Rupee.
 RBI can increase the FII limit on investment in government
and corporate debt instruments.
 It can invite long term FDI debt funds in infrastructure
sector.The ceiling for External Commercial Borrowings can
be enhanced to allow more ECB borrowings.

45. MEASURES BY GOVERNMENT:
Government should take some measures to bring FDI and
create a healthy environment for economic growth. Key
policy reforms that should be initiated includes:
Rolling of Goods and ServicesTax (GST)
DirectTax Code (DTC)
FDI in aviation and retail
Companies Bill and diesel decontrol

46. Efforts should be made to invite FDI but much more needs to
be done especially after the holdback of retail FDI and recent
criticisms of policy paralysis.
 The government took steps recently to loosen rules for
portfolio investment in the Indian market, indicating its desire
to sustain external inflows.
 The measure to increase External Commercial Borrowings
(ECB) to $10bn will help in borrowing in dollar at a less cost.
It may take similar steps to encourage FDI as well, helping
sustain external funding.

47. IS THE INDIA ONLY LOSER?
 The ongoing euro zone crisis and declining demand in the
developed nations has created risk-aversion in the markets.
 It explains why China's growth has decelerated so acutely and
also India's. It also tells us that it is the global factor that is
primarily responsible for India's economy running into rough
weather not coalition politics, lack of leadership, corruption,
assembly elections or any of the things we have been hearing
about.

48. CURRENCY JUNE 2011 JUNE 2012 % Change
INR 44.8448 57.135 -21.510
Brazilian Real 1.57794 2.07165 -23.831
Russian Rouble 27.9248 32.9582 -15.272
ChineseYuan 6.47807 6.35759 1.895

49. CONCLUSION
 Above data shows that INR is not the only currency
depreciating.
 Except for China almost every developing country has shown
a deprecating pressure on their currency.
 Not everyone can be blamed for poor monetary policy or
ineffective governance.

50. IN A NUT SHELL
The Indian Rupee has depreciated significantly against the US
Dollar marking a new risk for Indian economy.
Grim global economic outlook along with high inflation,
widening current account deficit and FII outflows have
contributed to this fall.
RBI has responded with timely interventions by selling dollars
intermittently. But in times of global uncertainty, investors
prefer USD as a safe haven.

51. To attract investments, RBI can ease capital controls by
increasing the FII limit on investment in government and
corporate debt instruments and introduce higher ceilings in
ECB’s.
Government can create a stable political and economic
environment.
However, a lot depends on the Global economic outlook and
the future of Euro zone which will determine the future of
INR.