Since the beginning of 2013, Rupee has reached 60.61 as compared to dollar. It has depreciated nearly 13% since May which became a major concern for country. At the time of independence in 1947, the rate of dollar was equal to rupee. The increased volatility in rupee – dollar rates has given sleepless nights to policy makers which require mapping strategies between Government and RBI.
NSE, MCX-SX and USE (United stock exchange) provide currency trading platform due to which they are likely to be adversely affected.
REASONS FOR RUPEE DEPRECIATION
BALANCE OF PAYMENT IMBALANCE
Current account deficit rises as imports become costlier which may accelerate wholesale and retail inflation due to costlier consumer goods like phones, cars etc. (which use imported goods) and fuels. Higher inflation and falling rupee will not allow monetary easing. Spending on discretionary goods will be effected. Globally the price of oil is quoted in dollars due to which refiners have to pay more for crude i.e. $105 per barrel from an average of about $100 in the month of June.
POLITICAL TURNMOIL IN EGYPT
Egypt supplied retreated oil through Suez Canal or pipeline running through Arab countries but political crises in the state caused interruptions which are expected to revive after appointment of military interim president.
RECESSION IN EUROZONE – INDIA’S LARGEST SUPPLY MARKET
Due to recession in Eurozone, risk averse investors are selling Euro and buying Dollars which lead to appreciation of dollar against other currencies. More reliance is put on ECB by investors.
BRAIN-DRAIN DUE TO BETTER BUSINESS OPPORTUNITIES IN U.S
Students are attracted towards USA because of better quality of business schools available there. After completing education they like to get employed in US due to higher level of salaries offered as compared to India and repay loan taken in dollars for financing education. Even aspirants of starting own venture find US as a more technologically advanced and start up friendly country.
FALL IN FOREX RESERVES- DUE TO SLOW CAPITAL FLOW
Lower capital flows depletes reserve. Corporate margins may dig due to low demand and higher input cost. Higher subsidy offered by Government in oil and fertilizers will adversely effect
COSTLIER ROLLING OVER DEBT- LEAD TO DEBT RESTRUCTURING
Declining profitability due to lower demand of restructured companies worsened debt payment capability.
POOR SENSEX PERFORMANCE DUE TO LOST INVESTOR’S CONFIDENCE
Due to past scams of companies in India investors lost confidence. Markets becoming volatile. Shift is seen from delivery based market to derivative or cash market as in derivatives only margins are required to be deposited whereas in delivery full price need to be paid to book order.
BLACK MONEY ECONOMY
Concentration of Indian money in Swiss banks to avoid taxes leads to decreasing its value.
POOR PERFORMANCE OF MUTUAL FUNDS
Excessive regulations and fall in prices of equity funds effected mutual fund sector.
INVESTMENT BANKS QUIT INDIA
Slowing deal cycles and falling stock markets pushed more than 200 banks out of India
IMPACT OF RUPEE DEPRECIATION ON COUNTRY
ADVERSE EFFECT ON DOLLAR EARNING COMPANIES.
Those companies earning in dollars will have to suffer exchange losses like IT firms.
ADVERSE EFFECT ON CONSUMER PRODUCTS INDUSTRIES
Automobile industry, Electronic industry (mobile, ipad etc.), FMCG industry that rely on imported components to be used in manufacturing will suffer as now imports will become expensive.
ADVERSE EFFECT IN TRANSPORT INDUSTRY
Need to curb leisure drive due to increase in fuel prices. Even air travels become expensive due to rise in prices of aviation fuel
HIT IN GOLD PRICES
In last 13years, first time fall in gold prices is seen due to investors lost faith in the metal as a store of value.
DENT IN RAW CASHEW IMPORTS
Cashew processor exporters usually import raw nuts from Africa which will become costlier due to depreciation in rupee value.
INFLATION WILL RISE
Curb discretionary spend to adjust for higher prices. 06.08% point rise in wholesale inflation if rupee drops 10%..
INCREASE IN INTEREST RATE
No chances of interest rate cut due to which EMIs will remain high.
US TRIPS AND STUDIES BECOME EXPENSIVE
Now more rupees will be needed to buy same number of dollar.
FALL IN MUTUAL FUNDS AND SHARES
If FIIs pull out more funds, then investment in shares and mutual funds will fall.
PROPOSED MEASURES BY GOVERNMENT
DIRECT FUNDING DONE BY CENTRAL BANK FOR CRUDE OIL PURCHASES BY REFINARIES
Companies like BPCL, HPCL shall fund their requirement for dollar from one bank only so as to reduce market volatility.
ISSUES OF BONDS
Floating a non-resident bond to mob up dollars.
FUEL COST CUT
Cutting fuel use by 40% in military driven vehicles.
RAISING FDI IN VARIOUS SECTORS
Increase in FDI cap in various sectors like telecom, defence etc. by 49% through direct route since stable flows needed to fund current account deficit which has widened to 4.8% of GDP in 2012-13.
RBI restricted banks from doing proprietary account trades in exchange traded currency segment. SEBI imposed stringent restrictions on trading positions and doubled margin requirements.
BOOST DOMESTIC MANUFACTURING
The manufacturing sector has seen a sharp reduction in growth since last year falling to 1% in 2012-13. This has even affected service sector. Strategies should be formulated to boost steel production, textile exports, launch of pilot project on electric and hybrid vehicles for Delhi. Government is also taking initiative to build an indigenous mid – sized civilian aircraft.
CURBING BLACK MONEY ECONOMY
Directing that money retained outside should be brought back to India. Now Mauritius is ready to plug loopholes in tax treaty.
CURBING UNNECESSARY EXPENDITURE OVERSEA
Imposing restrictions on discretionary non-trade payments overseas.
TAPPING DOMESTIC SAVINGS
Efforts should be made to direct domestic saving towards capital markets rather them piling them at home. More currency circulation will help in quick revival.
Major issues causing fall in rupee value is fiscal deficit i.e. excessive imports, excessive government borrowings which lead to inflation. Hence proper budgets at state and central level must be prepared by planning together and co-ordinating with each other. Multi – functional teams must be constructed with people draws from various spheres of the country to form strategies for the overall development of the country rather than concentrating on political interests.
A prosperous economy needs growth through accelerating exports, increasing investments, boosting manufacture, trading and service activities. This requires circulating money through meaningful channels and making India a business attractive spot by reducing number of regulation for building ventures.
WRITTEN BY – SHRUTIKA KOHLI
B.COM (H), MBA (FINANCE)
CA (FINAL) STUDENT
Email i.d. – email@example.com