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Depreciation of Indian Rupee and measures to control it

( This Essay is designed for the people who find Economics outlandish) For the last couple of months, Indian rupee has become the worst performing Asian currency
against the dollar. It is performing worst among all the major emerging economies. In the first week of July 2013, it crossed the psychological barrier of Rs. 60 and reached to an all time high of Rs.61 to the dollar and later on Rs. 64.5 by 22nd August. It is also assumed by the Duetsche bank that by the end of August it also may hit the range of rs. 70. The rupees, in recent times, have not only depreciated against dollar but against all the major currencies. In fact, the decline in the value of rupee has been sharper relative to British Pound and Euro. By the 2nd week of July 2013, 1 pound becomes equivalent to Rs.90.44 and 1 Euro equivalent to Rs.78.21.

So,In this present context, the major concern is Why the Indian Rupee is depreciating and measures to control it? There are three questions that needs answer; 1. Why is the Rupee depreciating? 2. What does it means common man? 3. What should be done about it? What we come across with day to day news analysis is: Depreciation has led to the costlier imports and since India is an import intensive country, its current account deficit (CAD) and trade account deficit is increasing at an alarming rate. Depreciation has increased the burden on the already high external debt of the country and by the end of March 2013; it increased to US $ 390.0 billion. The fall in the value of rupees has adversely affected the pace of economic growth as it has added pressure on the high inflation rate prevailing in the country. Depreciation has directly impacted persons working in import-intensive industries and allied sectors, those wishing to travel abroad or planning higher studies abroad. In short, the rupee's decline has affected everyone in the economy. Well, Lets now throw some light to the terms like " Depreciation", "Exchange rate or conversion rate" and their pros and cons.

Each country has its own currency and when we convert currency of one country with that of another country, it is called conversion rate or exchange rate between the two countries. For example- 1USD= INR60 which means if we convert 1 USD in INR we will get Rs.60. The conversion rate fluctuates on timely basis based on various factors such as demand and supply of each currency, inflation rate in country, interest rate prevailing in the country etc. Appreciation in any currency means when we exchange that currency with another currency, we will get more foreign currency or we need to pay less home country currency. On the other hand depreciation in a currency means 'a decrease in a currency's value (relative to other major currency benchmarks) due to market forces, not government or central bank policy actions'. In other words, when we say that the rupee is depreciating, it means that if at some time in the past, we could have bought one dollar (or one euro, dirham, pound) for say 55 rupees, we would now have to pay more. (At last count, this figure had 'breached' the Rs 60 mark), with the change having resulted due to 'market forces' and not government actions when we exchange that currency with another currency, we will get less foreign currency or we need to pay more home country currency. For example: Few months back, 1 USD= INR 45 which means for each 1$, we need to pay INR 45.While in current situation, 1USD= INR 60 which means for each 1$, we need to shell out INR 60. Thus we need to pay more INR compared to previous situation. Thus in this case, rupee has depreciated and USD has appreciated.

Reasons for Depreciation in rupee:


There are various reasons for depreciation in rupee. We will have our looks both from a economist's view and the view of a common man.

1. Current Account Deficit: The CAD is the difference between dollar outflow from exports and dollar inflow from imports. A rise in CAD means that we are absorbing more in imports than we are earning from exports, which has led us to paying more dollars than we earn, and thus depleted our foreign exchange reserves. As a result, to pay our import bills, we have to buy dollars, which drives up the demand for dollars and consequently, lowers the value of the Rupee.This situation arises when a country's' imports are more than its exports. Due to which it needs to buy more foreign currency to pay off the debts. Increase in the demand of foreign currency will ultimately reduce the value of that country's currency. India is facing a high current account deficit these days which led to fall in rupee value. 2. Inflation: It is one of most crucial factors in determining the currency exchange rate. We are experiencing very high inflation rate in India now. High inflation rate in the economy for quite a long time has resulted in the fall of nominal value of rupee. Looking at the current economic outlook, it is necessary for both government and RBI to step in and prevent the further depreciation of rupee. This will decrease the purchasing power against other currencies and will lead to depreciation of the Indian currency. 3. Political Paralysis:

In last few months, we have seen various corruption issues. The parliament is not functioning properly due to which several important Bills are pending. The Government is not able to make any firm decisions relating to investment and finance to attract investors. Due to political paralysis in country, the investors have taken a back seat which affected the inflow of funds and thereby led to depreciation in rupee. 4. Recession in Euro Zone: Sovereign defaults by nations such as Greece, the under performing international market and increased speculation in the market, has created an atmosphere of doubt and sowed the seeds of negativity in the minds of the investor. As a result, the investors feel it is safer to buy dollars rather than any other assets, this has pushed up the demand for dollars and thus its price; i.e. its value in rupees, has gone up.The effect of this recession in Euro Zone has been seen in Indian market also. The investors are selling Euros and buying Dollars which resulted in high demand for dollars and thereby increase in value of dollar. 5. Negative remarks of credit agencies: The major credit rating agencies such as Finch, S&P etc. have given negative remarks for India which made many foreign investors to stay away from investing in India for time being which resulted in reduction in inflow of foreign currency and thus depreciation in the value of rupee. 6. Strengthening of US dollar due to the decline in monetary policy of 'quantitative easing' by the US Federal. 7.Significant rise in domestic demand for gold Imports as has led to depreciation of rupee due to increasing Current account deficit as India has to pay sell its Forex reserves for gold imports. 8. Fiscal deficit in the Central budget is increasing at an alarming rate and at present it is at 4.5% of GDP. This deficit is financed by hot money flows and from FDIs. 9.The recent downgrading of India by international rating agency has made India less attractive destination for foreign investors. 10. Policy- paralysis prevailing in the country has adversely affected the sentiments foreign investors and this has led to flight of dollars from foreign institutional investments (FIIs).

Now come to

The effects of depreciation in rupee in India:


1. Rise in prices India imports all manner of commodities, the most prominent among these being oil and gold (and weapons, but that doesn't count, of course) to the more nondescript food grain. The falling rupee has pushed up the prices of these commodities, which means that 'people like us' will probably have to cut back on spending, postpone the purchases of jewellery, or a new car. For the poor man eking out a living on the street it will mean more misery, more hunger, and more pain.

2. Widening of the Fiscal Deficit At last count, the fiscal deficit was somewhere near the Rs 5 lakh crore mark. A weakening rupee will further widen this already colossal chasm between the government's revenue and expenditure as the government will have to pay a higher amount (in rupees), to repay its debt (in dollars). India's fiscal deficit is already termed as 'unsustainable' (interestingly, so is America's), and a further rise not only raises serious questions about the government's financial management capabilities but also contributes to rising inflation and damages the state's ability to support growth in case of a slump in industry. This puts thousands of businesses and millions of jobs at risk. 3. Reduction in growth rate In the present deplorable condition of the rupee, it is fairly obvious that not only are foreign investors collectively scoffing at the idea of earning in rupees, but even Indian businessmen, who are after all, businessmen, are saving their patriotism for cricket and promptly moving their investments overseas. This is affecting the growth rate adversely. 4. It is good for employees who are abroad and getting salary in dollars

Measures to control fall in rupee:


1. Allowing sovereign wealth funds, endowment funds and foreign central banks to invest in government bonds. The most obvious way to offset distribution is to increase growth and bring more dollars into the system, thus reducing the CAD. Relaxing of norms for FII investments is one of the more obvious ways to do it. Providing infrastructure and local support to the investors is another, admittedly more difficult avenue that can be explored in this regard. 2. Making government bonds available to a wider investor base Making government bonds available to non-resident investors will also increase the inflow of dollars in to the country and help contain the CAD, and in turn, the depreciation of rupee. 3. Boost the slowing industrial growth. Government should steps boost export-intensive sectors and develop import-substituting industries in order to make India less dependent on imports 4. More exports incentives and reduce imports. 5. Limit the foreign currency expenditure. 6. The RBI could persuade banks and financial institutions to raise funds in dollars abroad and lend them locally. 7. The government could review sectors such as defence, or revive pension and insurance reforms

8.Government should increase the limit of FDI in the existing sectors as well as encouraging in other sectors such as aviation, retail, telecommunication, radio & broadcasting etc.

9.Government should raise import duty on gold in order to decrease the domestic demand for gold import. Government and both RBI should take measures to bring down high inflation rates. 10. RBI should sell Forex reserves and buy rupees in an immediate action in order to arrest the further decline in the value of rupees. 11. RBI should hike the interest rates in order to reduce the money supply in the economy.

All said and done but it may be argued that if policy makers attempt to arrest the further
depreciation of rupees, then the over-all economic growth will take a back seat. Hence, we can say that the policy makers are facing a real challenge of arresting the fall in the value of rupee as well as reviving the already slow economic growth. The future of the Indian economy now depends on how our policy makers deal with the current global economic situations.