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Indian Rupee Continues to Fall-VRK100-14Dec2011

Indian Rupee Continues to Fall-VRK100-14Dec2011

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Indian Rupee touched a new historic low of 53.51 on 13 December 2011. Rama Krishna Vadlamudi, Hyderabad, analyses the reasons for the fall and debates whether RBI should intervene in the markets to shore up rupee.
Indian Rupee touched a new historic low of 53.51 on 13 December 2011. Rama Krishna Vadlamudi, Hyderabad, analyses the reasons for the fall and debates whether RBI should intervene in the markets to shore up rupee.

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Published by: RamaKrishna Vadlamudi on Dec 13, 2011
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12/17/2011

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Indian RupeeContinues to Fall 
Should RBI Intervene to Arrest Rupee’s Relentless Fall?
 
Rama Krishna Vadlamudi, HYDERABAD 14 December 2011 
www.ramakrishnavadlamudi.blogspot.com 
 In September 1998, Nelson Mandela wrote to speculator-cum- philanthropist George Soros asking how South Africa should deal with currency speculators like Soros himself. Writing back, Soros said that it was always futile to defend any indefensibleexchange rates and instead urged the South African leader toavoid excessive short-term external debt and to maintainstringent supervision over local banks.* 
We do not know whether South Africa benefited from Soros’ advice ofnon-intervention in foreign exchange markets. But, the Reserve Bankof India seems to be following a hands-off policy when it comes todealing with the Indian rupee’s sharp depreciation against the USdollar since the second week of August 2011.Between August 2011 and now, the rupee has fallen by almost 20percent against the dollar from a level of 44.74 to 53.51. On 13December 2011, the rupee touched an intra-day low of 53.51 beforesettling at 53.23 at day’s close.The sudden depreciation has shocked many Indian companies andothers engaged in foreign trade, investment, etc. Importers andcompanies with external debt with un-hedged exposures are caughtunawares. Many Indian companies (net foreign exchange spenders)declared high exchange losses during the July-September quarterlyresults. The costlier dollar (versus the rupee) has made life difficult forIndian travellers and students studying abroad.
* Source: “Soros – The Life and Times of A Messianic Billionaire” by Michael T. Kaufman 
 
 
Rama Krishna Vadlamudi, Hyderabad 14 December 2011 www.ramakrishnavadlamudi.blogspot.com 
Page 2 of 6 
The fear is that the exchange losses for India Inc may continue duringthe current quarter (October-December 2011) also.Countries, like, Switzerland and Japan are grappling with currencyappreciation. But, in India we are facing the opposite situation of asharp depreciation of the domestic currency against the US dollar.
What is troubling the rupee?
The current depreciation of rupee can be attributed mainly to twofactors: 1. external and 2. domestic. The external factor is themassive appreciation of dollar against other major currencies, whichcaused short supply of dollars impacting the value of rupeenegatively. The domestic factors that worked against the rupee are:slowdown in India’s GDP growth rate, sharp deterioration of industrialactivity as measured by IIP, persistent inflation, growing currentaccount deficit indicated by single-digit exports growth and double-digit imports growth, political logjam on various economic issues,rising fiscal deficit, weakness in stock markets, etc.Basically, the rupee fall is exaggerated by some sort of
self-fulfilling prophecy 
. The expectations of rupee falling to 50 were developing inAugust 2011 when rupee fell to 47. When it fell to 50 levels, expertspredicted that rupee would further go down to 52 levels. Now theytalk of rupee touching 56 or even 60 levels and the cycle goes on!The empirical evidence suggests that it is extremely difficult to predictlevels in foreign exchange markets. In July this year, everyoneexpected the US dollar to fall further against other major currencies.But to everyone’s utter surprise, the dollar has gained more than 10percent in the last four months or so!
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 Read more about the Indian Rupee:
Reasons for Indian Rupee’s Fall Stocks, Bonds, Rupee and Inflation Foreign Exchange Losses and India Inc - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
 
 
Rama Krishna Vadlamudi, Hyderabad 14 December 2011 www.ramakrishnavadlamudi.blogspot.com 
Page 3 of 6 
Should RBI intervene to shore up Indian rupee?
Amidst chaos and large foreign exchange losses, a clamour hasarisen from various quarters demanding the RBI to intervene in themarkets and stall the rupee’s free fall against the dollar. In the pastRBI intervened to either arrest the appreciation or depreciation ofrupee. As such, whenever some trouble arises, there have beendemands to RBI to protect the interests of the vulnerable entities.Between August and October 2011 when the rupee depreciated from45 level to about 50 level, the net sale of US dollars was practically nilindicating the RBI’s non-interventionist policy. The official RBIposition is: “We don’t target a level of exchange rate. The exchangerate is determined by the forces of supply and demand and otherfactors. We may intervene if there is excess volatility.”It is not clear whether the RBI still thinks the 20-percent fall of rupeeversus the dollar is not “volatile” enough for it to intervene in themarkets. If it has to strengthen the rupee, RBI has to sell dollars, partof the government’s official foreign exchange reserves, in the market.Opinion in the RBI seems to be veering to the view that the country’sforeign exchange reserves are precious and they have to beconserved for any future eventuality.The RBI’s figures show India’s foreign exchanges reserves at $ 314billion (Nov.11). Whereas, India’s total external debt is put at $ 317billion (Jun.11). While the total external debt to GDP is comfortable at17.4 percent (Mar.11), it is the share of short-term external debt(within one year residual maturity) to total debt at 42.2 percent(Mar.11) that is a big concern now.The RBI has kept its focus on taming inflation. India has experiencedelevated levels of persistent inflation for the past three years. To curbinflationary pressures, RBI has raised interest rates 13 times (by 375basis points or 3.75 percent) in the last 18 months. With the GDPgrowth rate in jeopardy now, the general expectation is that the RBImay relax its monetary tightening. There is also speculation that RBImay cut cash reserve ratio (CRR) for banks to improve liquidity.

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senufest added this note
Sir, could you please write an article on FERTILISER subsidy? I have gone though some articles in national dailies. But i have not understood the rationale behind it comprehensively

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