Exchange Rate Slide – What Impact Is It Having

the rupee has been unsettled whenever the global economy showed signs of trouble as in 2008. there has been a depreciation trend that is much more visible. Earlier as well. (Fig 1) Fig 1 Exchange Rates 2 . the rupee has been depreciating. Falling Rupee and Its Impact Since the current round of global uncertainties started after the downgrading of USA and the increasing threat perception of a Greek default.I. A look at the pattern of rupee in comparison to the four major currencies shows that since April 2011.

6 49. as reflected in the high and persistent current account deficits month after month.8 72.4 Pound Sterling 71.5 62.This would also be the new normal level of exchange rate.3 64.8 82.7 74.8 44.5 67.0 64.1 63.1 53.4 75.7 71. imported industrial intermediate products all are getting affected.2 77.1 73. metals and minerals.6 81.4 85.0 59.5 72.1 83.4 45.4 45.4 65.5 47.0 53.8 54. A depreciating rupee is bound to offset the decrease in the international prices of commodities such as oil.50.7 56. On the basis of ASSOCHAM’s interactions with market players.Such wild fluctuations in the rupee exchange rate within a short span of time are unsettling and leaving its imprint on the rest of the economy.6 74.7 53. imported coal.0 64.7 Euro 60. The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil.7 72. Impact on Oil Imports Oil imports consume he largest part of the forex reserves.7 69. The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country.2 67.1 in March 2012.4 Jun Jul Aug Sep Oct Nov Dec Jan 2012 Feb Mar A.2 65.8 in January 2012 and 55.8 64. US Dollar Jan Feb Mar 45.3 52.1 55.5 73. there could be two possible scenarios: Scenario 1: If the global recovery does not take place and the pattern of flow of funds away from the Indian economy continues as it has done in the recent months the exchange rate could well reach the levels of 53.7 55.3 71.2 70. the domestic costs will rise on account of rupee depreciation. As can be seen from the figure 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 3 .4 72.3 69.0 44.4 81.0 62.0 55.9 70.4 55.5 63.0 44.5 55.3 72. Scenario 2: If global economies are able to recover and the funds start to flow again into the Indian markets then the exchange rate would settle for somewhere around Rs 49.4 45.3 Yen 55.3 Apr May 2011 45.5 73.

since the beginning of this year. On November. till a few months ago to save costs arising out of higher interest rates and liquidity constraints within the country. The corporates had been increasingly tapping overseas loans. the increase in price of importing oil between April and Novemebr is to the tune of Rs.purchase the same quantity of oil. Brent crude oil price was $118.03 per barrel and exchange rate was Rs 52. 1 http://www. Impact on Debt A depreciating rupee is not only impacting the import bill it has also severly affected the cost of borrowings for the corporate sector. (Fig 2) Fig 2 Oil price and Exchange Rate Source: RBI B.8 per barrel. Take for instance crude oil imports.4 to a dollar. but the subsequent fall in the rupee value has negated the benefits. through ECBs (External Commercial Borrowing) and FCCBs (Foreign Currency Convertible Bonds).html 4 .7 to a dollar.livemint. Instead.46 per barrel on April 2011 when exchange rate for the rupee was Rs 44. As was reported recently1 Indian companies have borrowed close to $29 billion in foreign currencies. Thus. 489. The report suggested that a sharp fall of about 17 per cent in the value of rupee from near Rs 44-level against the US dollar at the start of 2011 to below Rs 51-level currently has made the cost of repaying these foreign loans costlier by a similar margin. oil price had gone down to $109. mostly in the US dollar. because of the rupee depreciation not much benefit can be derived out of the lower oil

5 billion or 3. NRI deposits and multilateral borrowings accounted for about 20 per cent of the increase in total external debt (Figure 3). Fig 3 External Debt – Outstanding US $ Billion Source: RBI Monthly Bulletin November 2011. Policy Changes and Cross-country Comparison* 5 . while a similar loan amount would have been worth about Rs 4. if the current currency valuations persist. The falling value of rupee may make the foreign loans availed by the Indian companies this year costlier by an estimated over Rs 25.134 crore (based on current rupee value of Rs 51. India’s external debt.34 per US dollar) towards the principal amount to a bondholder of $1 billion. External Debt Scenario As per the latest data made available by RBI. short-term trade credits and NRI deposits. was placed at US$ 317.000 crore (about $five billion). India’s External Debt:Trend. The external commercial borrowings and short term trade credits accounted for 70 per cent of the rise in total external debt over the quarter broadly reflecting the surge in imports.4 per cent over the end-March 2011 level primarily on account of increase in commercial borrowings.For instance an Indian company would now need to pay an amount of about Rs 5.These are certain payments for which funds need to be kept at hand always. as at the end-June 2011.0 billion recording an increase of US$ 10.400 crore at the beginning of 2010.

8 per cent at end-June 2011 declined marginally over end . 6 .5 per cent).7 per cent as at end-June 2011 (Figure 5).Now here again the depreciation of rupee is bound to increase the interest payments as indicated earlier that since April until November 2011 there has been an 16.2 per cent as at end-June 2011 followed by Japanese Yen (11. Policy Changes and Cross-country Comparison* Another key element to be noticed in the external debt picture of India is the exposure of debt in terms of various currencies.5 per cent (Figure 4).2 per cent in the total external debt as at end-June 2011. Fig 4 Government and Non-Government External Debt in percentage Source: RBI Monthly Bulletin November 2011.2 per cent from 74.March 2011 (25.Therefore what this could mean is that maybe Indian corporates might have gone in for cheaper loans from foreign avenues which now would have become expensive owing to the depreciating rupee.1 billion as at end-March 2010. The data suggests that the US Dollar denominated debt continued to be the largest with a share of 54. The share of Government external debt in the total external debt at 24.54 per cent depreciation.7 billion as at end-June 2011 as against US$ 67. the share of Euro accounted for3. the share of non-Government debt in total external debt rose during the quarter to 75.1 per cent).Government (Sovereign) external debt stood at US$ 78. India’s External Debt:Trend. The share of Indian rupee in the total external debt stock accounted for 19. On the other hand.

6 Source: RBI Monthly Bulletin November 2011.5 261 306.9 Ratio of foreign Exchange reserve to total External Debts 138 112.9 99. Policy Changes and Cross-country Comparison* As indicated in the table below (Table 1) unlike the case is with China where they have foreign reserves to the tune of 3 trillion dollars the foreign reserves in India’s case were just about equivalent to the external debt at the end of June 2011 period. India’s External Debt:Trend.5 99. India’s External Debt:Trend.4 224. Policy Changes and Cross-country Comparison* 7 .5 316.2 106.Fig 5 Currency Composition of External Debt in percentages Source: RBI Monthly Bulletin November 2011. Table 1: India’s External Debt and the ratio of Foreign Reserves to the Total External Debt 2007-08 2008-09 2009-10 2010-11PR end-June 2011P External Debts (US $ Billion) 224.

643.7 billion. • • Table 2: Effect of Depreciating Rupee on the External Debt Composition of India (in Rupees Billion) Total External Debt Government Debt Non-Government Debt Total External Debt End June-2011 End Nov-2011 Change 3525.2 8 . Therefore we can see that the depreciating rupee has had the serious effects upon the external debt figures of the nation.0 and 472.7 606.2 1643.0 10672.8 billion for the period June 2011 to November 2011.5 12316.7 --------242.7 80.5 1185. In terms of the three major components of external debt the changes in External Commercial Borrowings.9 2186. that in Japanese Yen has increased by Rs.0 525.2.4 8880.8 14198.4 1348. The currency composition for major currencies has also had an impact due to this depreciation.8 Currency Composition of Debt US Dollar SDR Indian Rupee Japanese Yen Euro Pound Sterling 7695.2 billion.S dollars has increased by Rs.2 207.8 -------1576.2 16384.9 37.7 543.3 241. NRI Deposits and Short term Debts have been Rs. 1185.6 -------1818.7 4068. 2186. Effect of a Depreciating Rupee Finally to somewhat understand the effect of depreciating currency on the external debt figures Table 2 has been tabulated taking an assumption that figures for various heads as given in the end of June 2011 period were the same for November 2011 and shows what shall be the effect on each parameter due to the depreciating rupee. The debt in U. Impact of a depreciating rupee: • Total external debt has increased by Rs.I. 242.2 278.6 1556.5 Billion respectively. 365.

5 1480.8 3067. We shall try and do so by looking at the trends in Net FII’s. let us try and understand as to how the crises in the U.1 2186.2 365.4 November Exchange Rate taken as 51.0 472. and European region might also be leading to this heavy depreciation in rupee. foreign institutional investors are supposed to be pulling out their money from various EME’s (Emerging Market Economies) and taking them back to their home countries in order to sustain themselves.6 9613. Why is the Rupee Falling Moving on.3 2369.2 98.S.5 2734.8 Components of External Debt External Commercial Borrowings NRI Deposits Short-Term Debt Key Components of External Debt June Exchange Rate taken as 44.Others Sum of Currency Composition of Debt 85.7 4176. In the light of uncertainty and fall in global stock market.4 643.9 13. As can be seen from the figures below since April barring the month of September we can see that whenever there has been a fall in the Net FII’s the exchange rate has depreciated considerably.7 4819.7 II.2 14198.3 16384.1 11094.8 3540. (Fig 6) Fig 6 Net FII and Exchange Rate Source: SEBI 9 .

255.8 44.5 -1865. Comparative Exchange Rate movements in EME’s To understand whether this phenomenon of depreciating rupee is a standalone case for India the study has tries to look at the currency trends of six other nations vis-à-vis the U. The falling index is partially an indication that FII’s are selling out.0 4883. The countries considered were China. Mexico and Russia.7 Exchange Rate 44. (Fig 7) As suggested by the trend lines amongst the nations considered South Africa has seen the highest level of currency depreciation.974. Brazil.224.352. India. 10 .97 Nov 15.Table:3 Trends in FII and Exchange Flow Net FII Apr May Jun Jul Aug Sep 7196.4 45.96 Aug 18.3 10652.6 Source: SEBI Key Observation BSE Index Bse Index Apr 19.822. South Africa.963.S dollar. (Table 4) Thus there is reason to believe that the crisis prevalent in the west is affecting almost all major economies worldwide.05 Jun 18. III. this would further increase the pressure on rupees.11 May 19.1 -4276.23 Sep 16. The trend seems to suggest that almost all the nations have seen their currencies depreciating since May 2011 barring China which has shown currency appreciation in the given period.463.12 Jul 18.4 45.9 -7902. followed by India.67 Oct 16.28 Source: SEBI Indian financial market index (BSE index) indicates a declining trend from April 2011 to November 2011.527.5 47.0 44.

67 per cent 11 .Fig 7 Comparative Exchange Rate movements in EME’s vis-à-vis U.S Dollar Appreciated by 2.

81 6.77 1.7 Source: http://www. some intervention from the Reserve Bank could become a critical stabilising factor.53 44.67 8.0 11.59 1.8 11.Apr May Jun Jul Aug Sep Oct Nov Brazil Real 1.81 6.98 6.86 27.25 6.36 51. However looking at all the above factors the magnitude of external debt.92 6.61 1.97 31.67 6. the demand is why not when the rupee is depreciating.66 6.html 47.5 13.24 7.91 6. Indeed. Reserve Bank had earlier intervened at times when the rupee was appreciating to protect the interests of Indian exports.72 6.50 45.46 44. Also there have been of lately suggestions made that.41 45.48 44.60 1.79 27.56 30.06 6.4 12. the currency composition of the debt as well as the continuous depreciation of the rupee makes one wonder 12 .3 13. So.83 6.4 11.45 7.73 6.S Dollar Mexican South Africa Russian China Indian Peso Rand Ruble Yuan Rupees 11.56 1.74 1. Should RBI Intervene ? The persistent decline in rupee is a cause of concern.78 Table 4: Exchange rates of Nations vis-à-vis U.73 28.19 30.09 28.59 1.6 13.04 7.37 49.79 27.

• The government can take initiatives which encourage and increase the flow of foreign investments into India. other than direct intervention • Oil import demand could be staggered and purchases co-ordinated so that at no point there is undue bundling of imports. 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. retail can also attract foreign investors. • The government can make investments attractive and invites long term FDI debt funds in infrastructure sector. V. 13 . Suggestions – What the authorities can do.whether the RBI should put extra burden on its existing foreign reserves on order to check this exchange rate fluctuation. • • Government can consider temporary import compression. FDI in the aviation industry.

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