Declining Indian Rupee Value


By

Soubhagya Hegde
MBA
Lecturer
Krupanidhi College
Bangalore, Karnataka
 


Introduction:

The Indian Rupee is the official currency of the Republic of India. The issuance of the currency is controlled by the Reserve Bank of India.

The exchange rate for any currency pair is determined by the buying and selling pressure of the respective currency with respect to the other. If the market does not think positively about a currency then there is a downward pressure on that currency. Such market expectations are determined by various macro-economic factors.

Indian rupee went to all time low against the US Dollar from past few months, which is broadcasting Rupee is weak.  Rupee value is one important feature which reflects the economic stability of the country.

Money is not an organic creature but its value keeps changing with the society and its economic conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power.

"The value of a currency depends on factors that affect the economy such as imports and exports, inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital, commodity prices and geopolitical conditions," says Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India), a foreign exchange brokerage

JOURNEY FROM 1966 TO 2013:

1966:
From 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Furthermore, the Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sector's negative savings rate.

As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. Inflation and large government budget deficits led the government to devalue the rupee.

And that was the time, the world's rich countries agreed to give 0.7% of their GNI (Gross National Income) as official international development aid annually.

In 1966, Foreign aid was key factor in preventing devaluation of rupee, Indian government itself thought to liberalize its restrictions on trade before foreign aid would again materialize.

Later, After Indo-Pakistani War 1965, US and other countries friendly towards Pakistan to withdraw foreign aid to India, which necessitated more devaluation.

1991: India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks' worth of imports.

At the end of 1999, the Indian Rupee was devalued considerably. In the year 1990 the rupee value was 18.11 in respect of Dollar. But In 1991, it has risen to 25.79 and by 1999 it reached 43.45.


As per the past data shown in the above chart, the period of 1991-2013 can be devided into 4 distinct phases.

* Pre-2001: This period sees a characteristic depreciation of the rupee.

* 2001-2007: This is the appreciation phase of the rupee.

* 2007-2010: A period of uncertainty due to the crisis of 2008 that had an extreme effect on the US dollar.

* 2010-2013: This period has seen a sharp depreciation and the rupee have reached all time lows.

Revaluation:

In the period 2000-2007, The Rupee stopped declining and stabilized ranging between 1 USD = INR 4448. In late 2007, the Indian Rupee reached a record high of Rs.39 per USD, on account of sustained foreign investment flows into the country.

This posed problems for major exporters, IT and BPO firms located in the country who were incurring losses in their earnings because of appreciation in rupee.

The trend has reversed lately with the 2008 world financial crisis as foreign investors transferred huge sums out to their own countries, which direct to record low of Rs. 49.82.

Year 2009 and 2010 was appreciation time of rupee when rupee value gained to 46.29 and 45.09 respectively from record low of 49.82. But again it got reversed and from 2011 to 2013 continuously rupee value came down and reached all time low phase because of which country is facing high economic problem at present.

Reasons for Declining Rupee Value:

There are several reasons for declining the rupee value.

1) Increasing the price of the goods and services (Inflation): Increasing the prices decreases the buying capacity of the consumers or it will decrease the demand for that particular product. Decrease in Demand wires decrease in exports, this will lead to lack of foreign currency into the country's economy and these all automatically routes to decrease in the value of rupee.

2) Imports are more than exports: Increases in Imports will direct to trade deficit i.e. huge imbalance in trade which is not healthiest to the country.  Trade deficit or a negative balance of trade represents augmented outflow of domestic currency to foreign markets and reduced inflow of foreign currency. Ultimately this will decrease the value of Indian rupee as there won't be much exchange and need of rupee.

3) Lower Capital Inflows: Basically we should know FDI (Foreign Direct Investment) helps to increase the inflow of funds to the country which helps to increase the value of the currency. FDI decision of other countries to Indian market depends on Uncertainty about India's commitment to economic reforms, retrospective taxes, and policy paralysis within the government. There are forced foreigners to either postpone their investment decisions, or take money out of Indian stock markets which is also one of the main reasons for declining rupee.

4) Demand-Supply Gap between Rupee and Dollar: Importers scuttle for dollars to provide for their needs to buy goods abroad. Exporters cannot bring enough dollars and in fact they keep their foreign earnings abroad and wait as they expect rupee value to come down which helps them to get additional money. Same time if the foreign investors increase the demand for Dollars to convert their rupee investment into dollars to take their money back. This will lead demand-supply gap between rupee and dollar and also decrease in the value of rupee.

5) Current Account Deficit: The large current account deficit (CAD) and our growing vulnerabilities on the external front have largely contributed towards the secular decline and the current volatility of the rupee.

6) RBI Step of Bid to sell Dollars: When RBI has taken decision of bid to sell dollars in the open market to get back the rupee value, it complicates the situation further. Because once currency trades or speculators realize, India's Central Bank is unable to manage its rupee value or exchange rate they may take decision to sell the rupee.

7) Lots of Scams which faded the image of India in the World:  Recently India is occupied by lots of scams which decreased the reputation of the country in the World. For example Corruption in the Country is increasing, Political instability etc. Government is not strong enough to take strong decision for growths of the economy etc are reducing the trust of the foreign investors.

8) Decreasing the GDP growth reduces the investment opportunities in India: Before the recession of 2008 India has maintained the GDP growth rate around 9% for many years. But now a day's increasing inflation, Lowering Index of industrial Production and rising fiscal deficit are scaring the investors.  Government is not able to bring any strong policies to restore the growth and by which investors are not seeing their investment will grow much here.

9) Economic Problems in many countries: Many countries are facing huge economic problems and facing financial crisis. As per their current thoughts, Investing in US is better option compared to emerging markets like India where growth is slowed down which increases the demand for Dollars, and it routes to decrease in the value of rupee.

10) Reverse flow of FDI: Because of India's stumpy GDP level, economic problems, already declined rupee value etc are making foreign investors less attractive and take back their money from Indian Market. This is again routing to decrease the rupee value further.

11) Global Economis Crisis: Because if mismatch between production, consumption, savings and investments, the world has witnessed hundreds of crisis. Inadequate growth of consuming power with rapid growth of productive forces is the basis for the periodic recurrence of demand crisis resulting in economic disorders.

BOON FOR THE COUNTRY:

India has vast resources and enormous man power to come out of the entire problems we are facing at present in India.

Below are the plus points of India in which it has competitive advantage and these needs to utilized in a proper way so that achieving growth or Revaluing Indian rupee are not a rigid task.

* Huge People Power or man power:

The most important thing in any business is the people. Any other natural resources only can be handled by people. Thus real resource of India is People Power.

The current population of India is estimated to be 1,270,272,105 (1.27 billion). In this 63.5% of people are between 15 to 64 years who are real human working asset of the country. India is the second most populous country in the world, after China.

If India utilizes human resources in proper way by improving the quality of people i.e. by providing enough food, better education and health conditions, India can easily achieve economic growth.

* Rich Natural Resources:

India is blessed with many natural resources.  The main natural resources of India are iron ore, bauxite, and copper ore. India is one of the major producers of iron in the world.

We can classify these natural resources as Renewable and Non-renewable. For example Renewable we have solar energy which India can use for different purposes and we can reproduce it again.

At the same time one needs to decide how to use scarce resources of the country optimally, both from the economic development and the sustainability perspectives. Examples for scares and Non-renewable resources are coal, petroleum, oil and natural gases etc.

* One of the Largest Economy:

As per the OECD (Organization for Economic Cooperation and Development) report 2013, India is probably world's third largest economy and between now and 2060, GDP per capita is seen to increase more than 8 fold in India.

To achieve this, In India Economic system, quality and performance should be improved. Hike in GDP level will automatically lead to revaluation of the rupee.

* India's Foreign exchange reserves:

Foreign Exchange Reserves are assets held by central banks and monetary authorities. As of July 2013 India's Foreign exchange reserve rose to USD 280.19 billion.

Higher level in foreign reserve is positive sign of the country.

* India's services sector:

Service sectors of India had shown that the country had the capacity to be a pioneer.  It accounts for large part of the Indian economy be it in terms of employment potential or its contribution to the National Income. For e.g.: telecommunications, satellite mapping and computer software etc.

As per 2013 data, share of service in India's gross domestic product at factor cost is 56.5%.

CONCLUSION:

To increase rupee value, India has to work upon the reasons which all noted above and has to take right decision based on the same.

As imports are exceeding exports, India should increase exports which will lead to inflow of foreign currency.  With this Country should also control the price of the products then only demand can be increased. Increase in demand routes to rise in the exports by mounting the buying capacity of the consumers.

And also India should concentrate on infrastructure, transport and storage facilities. Apart from inventing and producing the goods, safekeeping the same, right time supply to needful consumers, utilizing the available resources are require to decrease the expenses and increase the saving capacity of the country. By this India can also condense the current account deficit.

At the same time focusing on FDI is important because FDI will increase the foreign currency flow into the country. To increase the FDI first of all we should attract the foreign investors by improving our economic condition which is interrelated with rupee value.

Foreign Direct Investment will be effective only if the Government introduce the FDI policy where inflow of Foreign Direct Investment is utilized keeping in view of enhancing production of the country, so that increase in the national income, increasing the exports, arranging coordination between states by introducing equality policy, so that if all try together to work for nation growth, FDI also will be more effective and country can reach good growth in the economy with increasing the value of rupee.

Based on India's plenty of Natural resources, it cannot help our country unless they are tapped, handled and used in a planned way. So for this we need people. By utilizing an abundance people power in proper way country can achieve very good growth.

As per CII survey rupee will continue remain volatile and may weaken further against dollar if the government doesn't address issues like dwindling FDIs and infrastructural bottlenecks.

It also needs to take steps to improve investment environment and make India an attractive business destination for both domestic and foreign investors to prevent excessive volatility and downward pressure on the rupee.

REFERENCES:

* The Financial Express.
* Research Journal of Management Sciences
* www.livemint.com
* National Centre for trade data
* Wikipedia.org
* Moneycontrol.com
* Stanford Business graduate schools
 


Soubhagya Hegde
MBA
Lecturer
Krupanidhi College
Bangalore, Karnataka
 

Source: E-mail August 29, 2013

          

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