CA Srikant Agarwal

The exchange rate plays an important role on the whole financial economy of any country including Indian Economy.

In the recent past Indian currency (i.e Rupee) has depreciated against all the major currencies (i.e US $, Pound sterling £ , Euro € and Yen ¥) of the world and has reached to all time low level..

The exchange rate of Rs against these major currencies in the last few months is depicted by Figure 1 and Table 1.

Figure 1

Table 1

Month

US $

Pound sterling £

Euro €

Yen ¥

Jan-11

45.40

71.50

60.50

55.00

Feb-11

45.40

73.30

62.10

55.10

Mar-11

45.00

72.70

63.00

55.00

Apr-11

44.40

72.70

64.30

53.30

May-11

45.00

73.40

64.30

55.40

Jun-11

44.80

72.70

64.50

55.70

Jul-11

44.40

71.70

63.20

56.00

Aug-11

45.50

74.40

65.40

59.00

Sep-11

47.60

75.20

65.50

62.00

Oct-11

49.30

77.60

67.70

64.20

Nov-11

52.70

81.40

69.90

67.30

Dec-11

53.10

81.80

70.30

69.20

Jan-12

53.80

82.10

71.80

70.50

Feb-12

54.50

83.40

72.50

72.60

Mar-12

55.10

85.80

73.70

74.40

The impact of such wild fluctuation in Rupee exchange rate within a short span of time are unsettling and leaving its imprint on the rest of the economy.

The following are the major impacts of depreciation in Rupee:

1)      Increase in domestic inflation

2)      Impact on Oil imports

3)      Impact on Debt

They are discussed in following slides

1) Increase in Domestic Inflation:

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.

The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and minerals, imported industrial intermediate products all are getting affected.

2) Impact on Oil imports

Oil imports consume the largest part of the forex reserves. A depreciating rupee is bound to offset the decrease in the international prices of commodities such as oil.

As can be seen from the figure 2 below although the oil price per barrel has fallen however the depreciating rupee has not given any respite to the importer as they actually have to shell out more money in order to purchase the same quantity of oil.

3) Impact on Debt

A depreciating Rupee also affects the cost of borrowings for the corporate who has borrowed in foreign currencies through ECBs (External Commercial Borrowing) and

FCCBs (Foreign Currency Convertible Bonds) etc.

Because of weakening of Indian Rupee the benefit of lower exchange rates is getting nullified and the cost of foreign currency borrowing has come at par with domestic borrowing cost.

Why is the Rupee Falling

There are various reasons for depreciation in Rupee like increase in supply of money, reduction in foreign exchange reserve etc.

The main reason behind the recent devaluation of Rupee is the uncertainty and fall in the Global stock market as a result of which FIIs (i.e Foreign Institutional Investors) are pulling out their money from EME’s (Emerging Market Economies) and taking them back to their home countries in order to sustain themselves.

This can be shown with the help of Figure 3 and Table 2

Figure 3- Net FII and Exchange Rate

 

 

  Measures to resolve the problems:

The following are some of the measures that may be adopted by the authorities to control devaluation of money

ü  Oil import demand could be staggered and purchases co-ordinated so that at no point there is undue bundling of imports.

ü  The government can take initiatives which encourage and increase the flow of foreign investments into India. Three recent steps taken by the government be it the pension fund FDI limit or the increase in the investment limit investors in government security and corporate bonds are the steps in the right direction.

ü  The government can make investments attractive and invites long term FDI debt funds in infrastructure sector.

ü  Government can consider temporary import compression.

ü  FDI in the aviation industry, retail can also attract foreign investors.

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0 responses to “Rupee slide and its impact on Indian economy”

  1. Mahavir Kapshe says:

    Other reasons like 1) Political Instability 2) Indecisiveness at Government Level 3) No long term plans defined and placed for execution by Government are also affecting value of rupee. In general value of rupee can be equated with the value of share of a company. The way share value decreases if company is not profitable which indirectly means company has failed in optimally utilising its resourses. Similar is the case when the country fails in optimally utilising resources it has, currency looses its value.
    Resources include manpower. If human resources accounting is applied the scene accross globe will be different.

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