PROGRESS REPORT
Sl. No. Particulars
1 Name of the Student
2 Registration Number
3 Name of College Guide
4 Name and contact no of the Co-
Guide/External Guide (Corporate)
5 Title of the Dissertation
6 Name and Address of the
Company/Organistion where
dissertation undertaken with Date
of starting Dissertation
7 Progress report : A brief note
reflecting ,Number of meeting
with Guides, places visited,
libraries visited, books referred,
meeting with persons, activities
taken up, preparations done for
collection and analysis of data
etc.,)
Date:10-12-2018
Signature of the Candidate
AVIN VARGHESE
17X8CMD007
SRIKANTH
SACHIN MOHAN
9061505999
A STUDY ON FLUCTUATIONS OF
INDIAN RUPEE AND ITS IMPACT ON
INDIAN ECONOMY
NA
Visit the guide, and collect necessary data from
accounts department. Mainly visited the accounts
section, HR department, production department
and so on. In most of the days visit the library for
collecting books and secondary data which
includes journals, reports, magazines etc.
The data analysis is done through pyramid charts,
cylindrical charts, column charts, tables, diagrams
etc.
Signature of the College Guide
 CHAPTER:-1
INTRODUCTION
 INTRODUCTION
Exchange rate between two currencies is that rate at which one
currency will be exchanged with another currency. It is also known as a
foreign-exchange rate, forex rate. It is regarded as the value of one country’s
currency in terms of another currency. The spot exchange rate is the current
exchange rate. The forward exchange rate is that exchange rate which is
quoted today but delivery and payment settlement will be held on a
specific future date. A market-based exchange rate will change whenever
the values of either of the two component currencies change. A currency
tends to become more valuable whenever demand for it is greater than the
available supply.
Indian rupee was connected to British pound from 1950 to 1973. On 24th
September 1975, the connection between Indian rupee and pound was broken
down and rupee ties to the pound sterling were disengaged. A float exchange
regime was established by India. Effective rate of rupee was placed on a
controlled, floating basis and linked to a “basket of currencies” with trading
partners of India.
In 1993 Liberalized exchange rate system (LERMS) was replaced by the
unified exchange rate system and a system of market determined exchange
rate was adopted. However, the RBI did not relinquish its power to intervene
in the market to control the Indian currency.
In India a series of economic reforms including liberalization of foreign
capital inflows were initiated since the early nineties. Foreign exchange
market has emerged as the largest market in the world and the breakdown
of the Bretton Woods system in 1971 marked the beginning of floating
exchange rate regimes in several countries. The focus was given to wide
ranging reforms of widening and deepening the foreign exchange market and
liberalization of exchange control.
The Forex rates are determined by market forces and are based on
demand & supply of these currencies. If supply exceeds the demand, the value
of the currency depreciates. Rupee appreciation makes imports cheaper and
exports more expensive. According to intelligence reports by the As Commerce
and Industry of India, sectors like petroleum and petroleum products, drugs and
pharmaceuticals and import inputs of as much as 77 percent, 19 percent and 21
percent, respectively – will gain if the rupee appreciates.
The imported raw materials which would increase their profit margins.
Likewise, a depreciating rupee makes exports cheaper and imports expensive. So,
it is good news for industries such
tourism which generate income mainly from exporting their products or services.
Rupee depreciation makes Indian overseas buyers, thus leading to increases in
demand and higher revenue generation. The foreign tourists would find India,
therefore increasing the business of hotel, tours and travel companies.
India’s IT sector is dependent on foreign clients, especially the United States, for
more than 70 percent of its revenue project from a client, it pre-decides on the
length of the contract and the cost of the project. The contracts with U.S.dollar
terms. So, the fluctuation in the exchange rate can bring about a considerable
difference in the performance of Some companies undertake a range of measures
like hedging exchange risks using forwards and futures contracts.
the losses due to exchange rate fluctuations, but none-the-less the impact is
substantial.
The exchange rate is a significant tool that can be used to examine many key
industries; with fluctuations potentially
economy, industries, companies, and foreign investors. Rupee appreciation is
generally helpful for industries while depreciation of the rupee is welcome news
for industries which are exporting a majority of their products
The fall in the value of currency not only affects the pride of a nation, but also
affects a lot of economic growth indicators. Depreciation of rupee reduces
the inflow of foreign capital, rise in the external debt pressure, and also grow
India’s oil and fertilizer subsidy bills. The most positive impact of depreciation
of rupee is the stimulation of exports and discouraging imports and thus
improving the current account deficit. But, even after significant increase in the
exports and sales in this year, Indian companies are reporting huge foreign
exchange losses due to the depreciation of Indian rupee. This declines the
overall profitability of these companies. As far as imports are concerned, for a
country such as India, imports are necessary.
Grim global economic outlook along with high inflation, widening current
account deficit and FII outflows have contributed to this fall. RBI has
responded with timely interventions by selling dollars intermittently. But in
times of global uncertainty, investors prefer USD as a safe haven. To attract
investments, RBI can ease capital controls by increasing the FII limit on
investment in government and corporate debt instruments and introduce
higher ceilings in ECB‟s. Government can create a stable political and
economic environment. However, a lot depends on the Global economic
outlook and the future of Eurozone which will determine the future of INR.
As far as future of rupee is concerned, it is expected that there will be
a reverse trend with the steps adopted by central bank but it will impact for
short term only.
 IMPORTANCE OF THE STUDY

The importance of the study is in the circumstances which has been created for the
economy due to depreciation of rupee against dollar reveals that there has been
a strong and significant negative impact of this currency volatility on many sectors.
Indian economy which already suffered from large fiscal and current account deficit
adversely affected by relatively exchange rate pressure. To track it again on the way
many hard decisions were taken by RBI and Indian govt. Different challenges due to
these fluctuation and steps triggered by central bank and govt to create stability are
studied.

NEED FOR THE STUDY

The need of the study is to understand the concept of Exchange rate and currency
fluctuation. To understand the causes for decline of the rupee against dollar. To study the
real implications of the depreciation of the rupee on the Indian economy. Different
stringent measures by RBI & government to make rupee stronger. To propose potential
suggestions to overcome the problem.
 CHAPTER-2

REVIEW OF LITERATURE
 REVIEW OF LITERATURE

Chellasamy (2013) analyzed the effects on rupee depreciation against the dollar
covering the area of currency growth, foreign investment, and macro-economic
factors that affected Indian currency during the study period from 1989-1970 to
2012-2013.

Kotai (2013) studied that currency markets is the most volatile & liquid in all
financial market in the world. The paper analyzed the volatility behavior of
select five markets (INR/USD, JPY/USD, EURO/ USD, GBP/USD, and
CNY/USD) to find out which currency market is most volatile & sensitive. The
study found that Indian currency market is more volatile and sensitive compared
to other select countries and results show that Indian currency market is more
sensitive due to the external factors.

Kaur & Sirohi (2013) studied the after-effects of rupee depreciation i.e., change
in pattern of spending and savings of people who are getting affected by rupee
depreciation; like people having to pay more for their foreign education, costlier
imports and slow consumption, upturn in unemployment rate because of
reduction in earnings of companies, costlier foreign travel, high inflation
because of currency depreciation, etc.

Mirchandani (2013) The study identifies the causes of depreciation of the Rupee
and analyzed different macroeconomic determinants that have an impact on the
volatility of exchange rate and their extent of correlation with the same. Study
tries to identify the various probable reasons associated with it, likelower capital
inflows and uncertainty over Indian economy.
Bhandari (2014) This paper relates to the causes & impact of rupee depreciation
against dollar on Indian economy in the recent period when on August 28th
2013, the rupee closed to 68.80 against dollar resulting in the fear of Indian
economy returning to 1991 scenario.

Smriti (2013) The paper explored the dynamics, factors influencing and effects
of fluctuations in the exchange rate of Indian Rupee, exchange rates being the
most monitored, analyzed, and governmentally manipulated economic measure.

Kareethedath & Shanmugasundaram (2012) An attempt has been made to

understand the behavior of the Indian foreign exchange rate and its volatility
characteristics by using a daily observation of Indian Rupee against the US
Dollar from 1st April 1973 to 31st March 2012.

Sahoo, Satyananda (2012) Study analyzed volatility spillover effects from the
exchange rates of the Brazilian Real, the Russian Ruble, the South Korean Won,
the Singapore Dollar, the Japanese Yen, the Swiss Franc, the British Pound
Sterling and the Euro to the exchange rate of the Indian Rupee during 2005-11.

Dua & Sen (2006) Study examines the interactions between the variables
namely real exchange rate, level of capital flows, volatility of flows, fiscal and
monetary policy indicators, and the current account surplus for Indian economy
for the period 1993 to 2004. The study finds that determinants of the real
exchange rate, in descending order of importance, include net capital inflows
and their volatility (jointly), government expenditure, current account surplus
and the money supply.
Raithatha (2012) The paper studies effects of currency appreciation and
depreciation as boon and bane for economic growth &provides suggestions to
overcome ill-effects of excessive fluctuations between rupee and dollar keeping in
view current trends.In the international finance literature, various theoretical
models are available to analyze exchange rate determination and
behavior. Most of the studies on exchange rate models prior to the 1970s
were based on the fixed price assumption (Marshall (1923) [16]. With the advent
of the floating exchange rate regime amongst major industrialized
countries in the early 1970s, an important advance was made with the
development of the monetary approach to exchange rate determination. The
dominant model was the flexible-price monetary model that has been analyzed
in many early studies like Frenkel (1976) [11], Mussa (1976, 1979) [17,
18], Frenkel and Johnson (1978) [10], and more recently by Vitek (2005)
[27], Nwafor (2006), Molodtsova and Papell, (2007) [16]. Following this, the
sticky price or overshooting model by Dornbusch (1976, 1980) [8, 9] evolved,
which has been tested, amongst others, by Alquist and Chinn (2008) [1] and
Zita and Gupta (2007) [28].
Jayachandran conducted a study on The Impact of Exchange rate on
Trade and GDP for India a Study of Last four decade. This research has
provided empirical estimates of the Economic relationship between
Exchange Rate, Inflation, Government Revenue and Income growth in India.
In the long-run the exchange rate
and income may not drift apart, but in the short run their
relationship is weak and indirect. Together these results provide confirmation
that there is no evidence of a strong direct relationship between changes in the
exchange rate and GDP growth. Rather India’s Economic growth has been
directly affected by fiscal and monetary factors. Saleh Mohammed and
Shyamapada Biswas, examines the Exchange Rate and Its Impacts on GDP
and Inflation in Bangladesh. In this paper they compares the economic track
records of the two different exchange rate regimes the “Fixed Exchange
Rate” and the “Free Floating Exchange Rate System” in maintaining
economic performance. They also consider relationships between exchange
rate and Inflation and between exchange rate and GDP in Bangladesh.
Bangladesh experiences of moving away from a currency board system to
floating regime since 2003 offers a lesson worthy of attention from the point
of view of efficiency of “Floating Rate System” in least developed countries
like Bangladesh. Khondker, Bidisha, Razzaque (2012) [14] have conducted a
study on The Exchange Rate and Economic Growth: An Empirical Assessment
on Bangladesh. This study has made an attempt to examine the effects of
exchange rate changes on Bangladesh’s aggregate output, measured by GDP.
They concluded that the estimated real exchange rate elasticity’s lie in the
range of 0.24 – 0.42 with our preferred estimates being 0.24 – 0.28. That
is, a 10 per cent real depreciation of taka would lead to 2.4% to 2.8% increase in
GDP. However, in the short run, the impact of devaluations is likely to be
contractionary. The effect is small: a 10 per cent real devaluation is
associated with just above half a per cent decline in GDP.

Martin Rapetti, Peter Skott and Arslan Razmi, have examine the Real
Exchange Rate and Economic Growth: Are Developing Countries Different?
They observe that the additional and more conclusive evidence comes from
interacting the index of RER undervaluation with the level GDP per capita.
This strategy shows that the effect of currency undervaluation tends to
decrease with the level of GDP per capita. However, the decrease is not
monotonic as Rodrik suggests.
Consistent with his results, the effect of undervaluation on growth appears to
be largest for very poor countries, but our results also suggest that it is
sizable for middle- income countries as well.
Stotsky, Ghazanchyan, Adedeji, and Maehle, examines the relationship between
the foreign exchange regime and macroeconomic performance in Eastern
Africa. They found that lagged inflation, broad money growth and fiscal
position are key macroeconomic determinants of inflation. They observe
that the actual exchange rate regime in place, with flexible and
intermediate foreign exchange regimes producing lower inflation than the
pegged exchange rate regime. They also found the evidence of a
significant relationship between exchange rate movements and inflation, there
is no evidence for full pass-through, both in the short and long run.
Adeniran, Yusuf, Olatoke have examined the impact of exchange rate on
economic growth from 1986 to 2013. They observe that the exchange rate
has positive impact but not significant with (β =0.014, t = 1.783, Pns) this is
affirms previous studies that developing countries are relatively better off in
the choice of flexible exchange rate regimes. They also found that the
interest rate and rate of inflation have negative impact on economic
growth but not significant with (β = - 0.002, t = - 0.015, Pns) and (β = -
0.023, t = - 0.716, Pns) respectively. From the empirical reviewed work, some
authors argued that exchange rate is positively related to economic growth,
while some authors argued that it is negatively related.

Valuation History of Indian Rupee

Devaluation means officially lowering the value of currency in terms of
foreign currencies. There could be many motives of the devaluation. It
stimulates exports of commodities. It restricts import demand for goods and
services. It helps in creating a favorable balance of payments. Almost
all the countries of the world have devalued their currencies at one time or
the other with a view to achieving certain economic objectives. During the
great depression of 1930 devaluation was carried by most countries of the
world for the correcting their over- valuation. Since 1951, despite government
attempts toperiod with an average 1.78 percent annually whereas GDP grew
by 0.12 percent, Interest rate and Inflation rate grew by -0.23 percent annually
during the study period. So it is clear that the exchange rate grew so more
than GDP growth during the study period.
When the exchange rate is fixedand a country experiences high inflation
relative to other countries, that country’s goods become more expensive and
foreign goods become cheaper. Therefore, inflation tends to increase imports
and decrease exports. Since 1950, Indian continuously faced trade deficits.
Another reason, which played important role in the 1966 devaluation,
was war with Pakistan. The US and other countries withdrew their aid,
which further necessitated devaluation. To improve fiscal position,
Government of India devalued Rupee by whopping 57% against Dollar in 1991;
India still had a fixed exchange rate system, where the rupee was hooked to
basket of currencies of major trading partner countries. At the end of
1990, the Government of India found itself in serious economic trouble. The
government was close to financial default and its foreign exchange reserves
had dried up to the point that India could barely finance three weeks of
imports. In July of 1991 the Indian government devalued the rupee by 19.5%.
The government also changed its trade policy from its highly restrictive form
to a system which allowed exporters to import 30% of the value of their
exports (CAA A. Jain).

GDP growth rate, Exchange rate, Interest rate and

Inflation rate in India
data on GDP growth, Exchange rate,
Interest rate and Inflation rate in India during the period from 1987 to 2014.
It is observed from the table that the on an average annual growth rate of
GDP in India was
7.4 percent during the study period with increase of 1.85 times. Whereas on
an average exchange rate was 38.38 per $ with increase of 4.71 times
during 1987 to 2014 it was very high than GDP growth rate during this
period. During the study period on an average Interest rate was
13.36 percent and Inflation rate was 7.87 percent. It is found that Interest
rate and Inflation rates are decreased in 2014 with compare to the initial
year 1987. It is observed from the data that the highest compound growth rate
recorded by Exchange rate i.e. 4 percent followed by GDP growth rate 1.82
percent and Interest rate and Inflation rate recorded -0.007 percent and -
0.004 percent compound annual growth rate respectively during the study
period. The Exchange rate grew during this study period with an average
1.78 percent annually whereas GDP grew by 0.12 percent, Interest rate and
Inflation rate grew by -0.23 percent annually during the study period. So it is
clear that the exchange rate grew so more than GDP growth during the study
period.
 STATEMENT OF THE PROBLEM

The circumstances which has been created for the economy due to
depreciation of rupee against dollar reveals that there has been a strong and
significant negative impact of this currency volatility on many sectors. Indian
economy which already suffered from large fiscal and current account deficit
adversely affected by relatively exchange rate pressure. To track it again on the
way many hard decisions were taken by RBI and Indian govt. Different
challenges due to these fluctuation and steps triggered by central bank and govt to
create stability are studied.

SCOPE OF THE STUDY

T This study is concerned to check the Impact of the Exchange rate and currency
fluctuationDepreciation of the rupee and Solutions to overcome the problem

OBJECTIVES OF STUDY

 To understand the concept of Exchange rate and currency fluctuation.

 To understand the causes for decline of the rupee against dollar.

  To study the real implications of the depreciation of the rupee on the
Indian economy

 Different stringent measures by RBI & government to make rupee

stronger

 To propose potential suggestions to overcome the problem

HYPOTHESES

 Analyzing the Financial position

 Analyzing the annual report of the companies
 Promoting company towards its position to improve
 Developing the financial status of the company

SAMPLING

Since the performance evaluation of the study area is unknown the research has
decided to follow sampling technique for the present research work. There are 4
respondent are selected for the study using convenient sampling technique The sample
size is decided after considering the financial position and time factor.

TOOLS FOR DATA COLLECTION

The study required the collection of the information from the both primary and
secondary which collected and analysed to come to a suitable conclusion and
interpretation.
The data has been collected both from the primary sources as well as from the
secondary sources.
1. Sources of primary data
 Primary data is original in nature. Primary data is the main source of data, which is
mainly collected through observation, survey, and interview from various organizations
in mutual funds industry.
The data is collected through personal interview with the managers of the financial
department and accountant of the company.
The primary data has been collected from the information provided by the
company and through consultation with various departmental heads and also through
observation.
2. Sources of secondary data
Secondary data are static that already exist. Those in existence or some other
purpose and they have been gathered not for immediate use.
This may be desired as those data that have been compiled by some agency other
than the user.
The secondary data has been collected from various online sources.
The data has been collected from:
 Company website
 Internet
 Journals
 Annual reports
 Company manuals

DATA ANALYSIS
Primary data and secondary data which were collected are clearly compiled,
classified and explained trough flowcharts, diagrams and illustrations, tables and graphs
to come to conclusions. Interferences are drawn from the findings & by those findings
suggestions have been presented.
The tools used for data analysis are as follows:
 Tables
 Diagrams
  Pyramid charts
 Column charts
 Cylindrical charts etc.

LIMITATIONS OF THE STUDY

Research is always subject to inherent limitations. Following are the limitation of

the study,

 The data collected is basically confined to data from RBI website and other online
sources
 There is a constraint with regard to time allocated for the research study.
 The availability of information in the form of reports & other data is a big
constraint to the study.

SIGNIFICANCE OF THE STUDY

In this it explores the impact of Rupee-Dollar fluctuation on Indian economy.
The circumstances which have been created for the economy due to the
depreciation of rupee against dollar reveals that there has been a strong and
significant negative impact of this currency volatility on many sectors. It also
presents different challenges due to these fluctuation and steps triggered by the
central bank and government to create stability.

SCHEME OF THE STUDY

The study is set out of five chapters. The first chapter contains a description
of introduction, statement, objectives, scope, significance, research methodology
adopted and limitation of the study. The second chapter presents a review of
literature. The chapter three provides the case context. The forth chapter includes
data analysis and interpretation. Chapter five is the concluding chapter of the
study. It draws on the major findings and concludes within a few suggestions.

CHAPTER: 3
PROFILE OF THE SELECTED ORGANIZATION
 PROFILES OF CONCERNED ORGANIZATION

FOREX :
The foreign exchange market (Forex, FX, or currency market) is a global
decentralized or over-the-counter (OTC) market for the trading of currencies. This
market determines the foreign exchange rate. It includes all aspects of buying,
selling and exchanging currencies at current or determined prices. In terms of
trading volume, it is by far the largest market in the world, followed by the Credit
market.

The main participants in this market are the larger international banks. Financial
centres around the world function as anchors of trading between a wide range of
multiple types of buyers and sellers around the clock, with the exception of
weekends. Since currencies are always traded in pairs, the foreign exchange market
does not set a currency's absolute value but rather determines its relative value by
setting the market price of one currency if paid for with another. Ex: 1 USD is
worth X CAD, or CHF, or JPY, etc.

The foreign exchange market works through financial institutions, and operates on
several levels. Behind the scenes, banks turn to a smaller number of financial firms
known as "dealers", who are involved in large quantities of foreign exchange
trading. Most foreign exchange dealers are banks, so this behind-the-scenes market
is sometimes called the "interbank market" (although a few insurance companies
and other kinds of financial firms are involved). Trades between foreign exchange
dealers can be very large, involving hundreds of millions of dollars. Because of the
sovereignty issue when involving two currencies, Forex has little (if any)
supervisory entity regulating its actions.

The foreign exchange market assists international trade and investments by

enabling currency conversion. For example, it permits a business in the United
States to import goods from European Union member states, especially Eurozone
members, and pay Euros, even though its income is in United States dollars. It also
supports direct speculation and evaluation relative to the value of currencies and
the carry trade speculation, based on the differential interest rate between two
currencies.

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is India's central banking institution, which
controls the monetary policy of the Indian rupee. It commenced its operations on 1
April 1935 in accordance with the Reserve Bank of India Act, 1934. The original
share capital was divided into shares of 100 each fully paid, which were initially
owned entirely by private shareholders. Following India's independence on 15
August 1947, the RBI was nationalised on 1 January 1949.

The RBI plays an important part in the Development Strategy of the Government
of India. It is a member bank of the Asian Clearing Union. The general
superintendence and direction of the RBI is entrusted with the 21-member central
board of directors: the governor; four deputy governors; two finance ministry
representatives (usually the Economic Affairs Secretary and the Financial Services
Secretary); ten government-nominated directors to represent important elements of
India's economy; and four directors to represent local boards headquartered at
Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local boards
consists of five members who represent regional interests, the interests of co-
operative and indigenous banks.

The central bank was an independent apex monetary authority which regulates
banks and provides important financial services like storing of foreign exchange
reserves, control of inflation, monetary policy report till August 2016. A central
bank is known by different names in different countries. The functions of a central
bank vary from country to country and are autonomous or quasi-autonomous body
and perform or through another agency vital monetary functions in the country. A
central bank is a vital financial apex institution of an economy and the key objects
of central banks may differ from country to country still they perform activities and
functions with the goal of maintaining economic stability and growth of an
economy.

The bank is also active in promoting financial inclusion policy and is a leading
member of the Alliance for Financial Inclusion (AFI). The bank is often referred to
by the name Mint Street. RBI is also known as banker's bank.
 CHAPTER: 4
PERFORMANCE EVALUATION OF IMPACT OF
FLUCTUATION
PERFORMANCE EVALUATION OF FLUCTUATION

From 1950 to 1973 Indian rupee was linked to British pound. In 1966 and 1973
devaluation happened. On 24th September 1975, the connection between Indian
rupee and pound was broken in 1975; the rupee ties to the pound sterling were
disengaged. India established a float exchange regime with the rupee’s effective
rate placed on a controlled, floating basis and linked to a basket of currencies” of
India’s major trading partners. In 1993 Liberalized exchange rate system (LERMS)
was replaced by the unified exchange rate System and hence the system of market
determined exchange rate was adopted. However, the Indian rupee and its
exchange rate historically.
Before 2011 India had faced two major devaluations that are in the year 1966 and
1991. So let’s understand the reasons and the measures adopted by government for
the major devaluations that took place in India. The Indian rupee has dropped by
nearly 4% to a new low of 68.7 to the US dollar amid growing concerns over the
health of the country's economy. The decline comes a day after India approved
infrastructure projects worth $28.4bn (£17.7bn) to try to revive the economy and
prop up its currency.
The rupee has lost 20% of its value this year and is one of the world's worst-
performing currencies. It has also been hit by fears that the US will scale back
stimulus measures. The US central bank has sought to increase liquidity in the US
economy, through its policy of quantitative easing, in an attempt to boost growth.
A part of that liquidity has flowed into Asian markets, such as India, and lifted
stock and asset prices. However, the Federal Reserve has said it will scale back the
program if the US economy improves, with some analysts expecting this "tapering"
to begin as soon as next month.
That has seen investors pull money out of emerging markets, hurting currencies
and stocks in those countries. The Indian Rupee has depreciated to an all time low
with respect to the US Dollar. On 28th August 2013, the Indian rupee had gone
down to 68.825 against the Dollar but the situation was somewhat revived by the
Reserve Bank of India that decided to open a special window for helping state
owned oil companies – Indian Oil Corp Ltd., Bharat Petroleum Corp and
Hindustan Petroleum Corp.
The beneficiaries will be able to buy dollars through this window till further notice
is provided. These companies, together, require about 8.5 billion dollars every
month to import oil and it is expected that this will help them meet the
requirements. This has had an immediate effect as is evident from the fact that the
INR has started at 67 against the USD at the early proceedings in the Interbank
Foreign Exchange Market.

EVALUATION OF IMPACT:

Impact on Currency
Inflation rates in India have risen about 8.50% amid concerns surrounding the
devaluation of the rupee and the erosion of the purchasing power of savings. In
spite of Governmental interventions, the rupee is in a free-fall, having slipped by
over 20%, making it one of the most awful performing currencies globally. RBI
made thirteen rate increases attempts to docile the inflation in last one year but
hardly achieved any significant result.
Inflation rate maintained upwards trend. This is now reflected through the currency
depreciation. Inflation directly enhances prices and thereby affects the purchasing
power of currency. Currency value and inflation have a direct co- relation and
impact each other. The currency re-evaluation is also essential with the change in
domestic prices affected by inflationary forces. Currency is considered to be
overvalued if the suitable adjustment is not made with the price index fluctuations.

Impact on Gold
India currency devaluation has also resulted in surge of import by over 200% of
gold and silver. Statistics show that imports of gold and silver to India were $8.96
billion a growth of 222%. The Reserve Bank of India purchased 200 tons of gold
from the International Monetary Fund in 2009. From the start of 2011, some 30
banks in India have been granted permission to import gold and silver. Further
gold purchases are expected in coming months, as the Reserve Bank has issued
licenses to seven more banks to import gold and silver. Indian banks are therefore
contributing to the massive increase in demand for gold and silver.
Chinese banks are also catering to the increased demand of Chinese people for
gold bullion for investment and savings purposes. In fact, most of the world’s
central banks are now diversifying from major currencies such as the dollar and
euro into gold. In addition to India and China, these countries include Russia, Sri
Lanka, Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia. Financial experts
believe the increased demand for gold and silver from India and wider Asia is
sustainable and that it will keep the precious metal market thriving.

Impact on Stock Market

As a result of de- valuation, Indian stock markets will face new threats. The
operators and participants were earlier concerned about domestic inflation rate and
the Reserve Bank of India’s economic policies. But the fall in the value of Indian
currency has taken aback all concerned. The investors are bound to suffer as there
is always a positive correlation between stock index and corporate results.
Impact on Market Forecast The wide-ranging perception in the financial market is
that until the global macroeconomic environment settles, the rupee will continue to
be under pressure. "India's external position has become increasingly vulnerable to
global risk appetite. Further weakness cannot be ruled out," Royal Bank of
Scotland said in a research note. The rupee is down 14.80% on the year, with the
closest loser among other Asian units being the Thai baht, which has shed just
3.2%, followed by the Malaysian ringgit that is down 3%.
The rupee's slither may continue due to the decline in foreign exchange inflows
and swelling outflows. The Euro zone, the world's largest trading block and India's
biggest trading partner, is also in a deep crisis. In times to come, this zone has to
stabilize to bring some semblance of order to the global currency markets.
Numbers of Indian scams have also distracted government’s concentration away
from economy. These scams make the bad image of India in the global market.

Analysis and Interpretation

Since last decade the Indian foreign exchange market has undergone significant
changes and has been subjected to few shocks. It is clearly reflected by the ups
and downs of Indian Rupee exchange rate against the US Dollar.

Table No. 1: Macroeconomic Variables in India for the Period of 1991 to 2013

Years Exchange Inflation Lending FDI GDP Current

Rate Rate Interest (Current Growth Account Deficit
against $ (CPI) Rate US $ Billion) rate (%) (US $ Billion)
1991-92 22.6890 13.9 17.9 0.74 1.1 -1.178
1992-93 25.9206 11.8 18.9 2.77 5.5 -3.526
1993-94 31.4439 6.4 16.3 5.5 4.8 -1.159
1994-95 31.3742 10.2 14.8 9.73 6.7 -3.369
1995-96 32.4198 10.2 15.5 21.44 7.6 -5.912
1996-97 35.4280 9 16 24.26 7.5 -4.619
1997-98 36.3195 7.2 13.8 25.77 4 -5.499
1998-99 41.2665 13.2 13.5 26.35 6.2 -4.038
1999-2000 43.0552 4.7 12.5 21.69 8.8 -4.698
2000-01 44.9401 4 12.3 34.8 3.8 -2.666
2001-02 47.1857 3.7 12.1 66.15 4.8 3.4
2002-03 48.5993 4.4 11.9 88.03 3.8 6.345
2003-04 46.5818 3.8 11.5 88.86 7.9 14.083
2004-05 45.3165 3.8 10.9 102.02 7.9 -2.47
2005-06 44.1000 4.2 10.8 260.32 9.3 -9.902
2006-07 45.3070 6.1 11.2 677.42 9.3 -9.565
2007-08 41.3485 6.4 13 756.43 9.8 -15.738
2008-09 43.5049 8.4 13.3 905 3.9 -27.917
2009-10 48.4049 10.9 12.2 718 8.5 -38.18
2010-11 45.7262 12 8.3 783 9.3 -48.053
2011-12 46.6723 8.9 10.2 526.79 6.2 -78.155
2012-13 53.4368 9.3 10.6 387.22 4.7 -88.163
2013-14 59.08 10.9 8 400.6 4.675 -90.3
Factors Affecting Exchange Rate of Rupee against the Dollar
The exchange rate of any currency gets affected by many factors (variables) that
have positive or negative impact. The main variables of Exchange rate are:
1) Current Account Deficit;
2) Inflation Rate;
3) Gross Domestic Product (GDP) Growth Rate;
4) Lending Interest Rate; and
5) Foreign Direct Investment (FDI).
Inflation Rate: High inflation means high prices for goods and services which
affect the country’s exports by decreased demand from other countries, causing
in decreased demand for the rupee leading to depreciated rupee value.
Table No. 2: Correlation of Inflation with Exchange Rate
Exchange Rate against $ Inflation Rate (CPI)
Exchange Rate against $ Pearson Correlation 1 -0.335
Sig. (2-tailed) 0.118
N 23 23
Inflation Rate (CPI) Pearson Correlation -0.335 1
Sig. (2-tailed) 0.118
N 23 23

Result: Inflation has negative correlation with Exchange Rate of an Indian

currency since the value of r is - 0.335. This correlation is significant at 0.01
level.
Lending Interest Rate: A high interest rate is one of the factors, that attracts
foreign investors to gain out of this situation. Through the arbitrage process, an
investor takes the advantage of high interest rate in another country. This factor
affects the exchange rate positively though it appreciates the value of currency.
Table No. 3: Correlation of Lending Interest Rate with Exchange Rate
Exchange Rate against $ Lending Interest Rate
Exchange Rate against $ Pearson Correlation 1 -0.906**
Sig. (2-tailed) 0.000
N 23 23
Lending Interest Rate Pearson Correlation -0.906** 1
Sig. (2-tailed) 0.000
N 23 23
Result: Correlation between Exchange Rate of an Indian currency and lending
Interest rate is negative since the value of r is – 0.906.
Foreign Direct Investment (FDI): Foreign direct investment (FDI) is one of
the popular source of investment into a business in a country other than the
home country by a company or individual of another country. It has been seen
that FDI affects the exchange rate to strengthen.

Table No. 4: Correlation of FDI with Exchange Rate

Exchange Rate FDI (Current US

against $ $ Billion)
Exchange Rate against $ Pearson Correlation 1 0.0462*
Sig. (2-tailed) 0.026
N 23 23
FDI (Current US $ Billion) Pearson Correlation 0.0462* 1
Sig. (2-tailed) 0.026
N 23 23
*. Correlation is significant at the 0.05 level (2-tailed).

Result: Relationship between exchange rate and FDI is positive as the value of r
is 0.0462.
Gross Domestic Product (GDP) Growth Rate: GDP is the total of the market
value of finished goods and services produced in a country in a stipulated time
period (year). To determine the country’s standard of living, GDP per capita is
considered as good indicator.
Table No. 5: Correlation of GDP, Growth rate with exchange rate
Exchange Rate against $ GDP Growth rate (%)
Exchange Rate against $ Pearson Correlation 1 0.0182
Sig. (2-tailed) 0.405
N 23 23
GDP Growth rate (%) Pearson Correlation 0.0182 1
Sig. (2-tailed) 0.405
N 23 23
Result: The relationship between GDP Growth rate and exchange rate is
positively correlated as the value of r is 0.0182 and it is significant at 0.05 level.
Current Account Deficit: When country’s revenue income gets short of
revenue expenses then it leads to the situation of current account deficit.To
 settle this problem, a country takes foreign loans which impact the exchange
rate as it increases the demand for foreign currency. In case of current account
surplus, the opposite happens.
Table No. 6: Correlation of Current account Deficit with exchange rate
Exchange Rate Current Account
against $ Deficit (US $ Billion)
Exchange Rate against $ Pearson Correlation 1 -0.558**
Sig. (2-tailed) 0.006
N 23 23
Current Account Deficit Pearson Correlation -0.558** 1
(US $ Billion) Sig. (2-tailed) 0.006
N 23 23

There are many reasons due to which this critical situation came in to economy and
grabbed more attention of RBI and Indian govt. towards this scenario. Some of the
reasons are mentioned below. A number of factors can cause currency
depreciation, i.e. economic, political, corruption etc., but some factors require
greater attention and should be analyzed objectively than the others.

1. Dollar On A Strong Position in global market

The main reason behind rupee fall is the immense strength of the Dollar Index,
which has touched its three-year high level of 84.30. The record setting
performance of US equities and the improvement in the labor market has made
investors more optimistic about the outlook for the US economy.
2. Recession in the Euro Zone Is Back on the move:
The rupee is also feeling the pinch of the recession in the Euro zone. From the past
few months global economy is suffered from Euro crisis, investors are focused on
selling Euros and buying dollars. Any outward flow of currency or a decrease in
investments will put a downward pressure on the rupee exchange rate.

3. Decreasing rating by Rating Agencies & slow growth projection by IMF

Due to uncertainty prevailing in Europe and the slump in the international markets,
investors prefer to stay away from risky investments. The credit rating agency such
as Moody has downgraded the India to BBB with a negative outlook. IMF also
signed 5.6% growth rate for the economy. This global uncertainty has adversely
impacted the domestic factors and could lead to a further depreciation of the rupee.

4. Pressure of increasing Current Account Deficit:

The country with high exports will be happier with a depreciating currency India,
on the other hand, does not enjoy this because of crude oil and gold consist a major
portion of its import basket. Euro zone, one of India's major trading partners is
under a severe economic crisis. This has significantly impacted Indian exports
because of reduced demand. Thus India continues to record a current account
deficit of around 4.3%, depleting its Forex reserves.

5. Impact of Commodity Prices in Global Market

As there was a sharp fall in the commodity prices (of gold and crude oil) in global
market still a large part of the import bill is driven by other resources as well. The
facts show that fertilizer imports surged by 30% in the last two years and coal
imports have doubled. The falling commodity prices on the other hand have
increased imports resulting in an imbalance in the rupee value.
6. Speculations from Exporter and Importer side.

The reason of fall in rupee can be largely attributed to speculations prevailing in

the markets. Due to a sharp increase in the dollar rates, importers suddenly started
gasping for dollars in order to hedge their position, which led to a further demand
for dollars. On the other hand exporters kept on holding their dollar reserves,
speculating that the rupee will fall further in future. This interplay between the two
forces further fuelled the demand for dollars and a fall in rupee.
7. Unattractive Indian Market

FII‟s are a good source of dollars inflow into the Indian market. As per a recent
report, the share of India‟s FII in the developing markets has decreased
considerably. Unsuccessful auction of 2G have further rendered the Indian market
unattractive for foreign investors. Strict political policies are also reasons of such
lack of appeal.
8. Interest Rate Difference:

Higher real interest rates generally attract foreign investment but due to slowdown
in growth there is increasing pressure on RBI to decrease the policy rates. Under
such conditions foreign investors tend to stay away from investing. This further
affects the capital account flows of India and puts a depreciating pressure on the
currency.
9. Persistent inflation:

India has experienced high inflation, above 8%, for almost two years. If inflation
becomes a prolonged one, it leads to overall worsening of economic prospects and
capital outflows and eventual depreciation of the currency.
10. Lack of reforms:

Key policy reforms like Direct Tax Code (DTC) and Goods and Service Tax
(GST) have been in the pipe line for years. A retrospective tax law (GAAR) has
already earned a lot of flak from the business community. This has further made
investors.

Challenges in Front of RBI and Indian Govt.

Bank rate : Due to these fluctuation bank rate raised from 8.25% to 10.25% and
Limit of lending overnight borrowing from RBI fixed to Rs75000cr. This was
again a problem as cost of short term borrowing rise for corporate. This was done
to tame inflationary expectations. So further raising interest rates would lead to
lower growth levels.

Forex Reserves: RBI can sell forex reserves and buy Indian Rupees leading to
demand for rupee. But using forex reserves poses risk also, as using them up in
large quantities to prevent depreciation may result in a deterioration of confidence
in the economy's ability to meet even its short-term external obligations
Make Investments Attractive- Easing Capital Controls: RBI can take steps to
increase the supply of foreign currency by expanding market participation to
support Rupee. RBI can increase the FII limit on investment in government and
corporate debt instruments. It can invite long term FDI debt funds in infrastructure
sector. The ceiling for External Commercial Borrowings can be enhanced to allow
more ECB borrowings.
Increasing burden of servicing and repaying of foreign debt: A major drawback
of depreciation in the value of rupee is that it will enhance the burden of servicing
and repaying of foreign debt of Indian Government (which has dollar denominated
debt) and those companies that has raised dollar denominated debt. Most of the
foreign loans which are denominated in dollars, will create a burden of costly short
term debts with immediate effect.
 CHAPTER: 5
FINDINGS, CONCLUSIONS AND SUGGESTIONS
 CONCLUSION
The study that has been carried out hopefully creates awareness on the fact
that initial success story of India was clearly based on factor driven economy based
on labour arbitrage that is providing low cost labour in comparison to another
country. At this stage development is sensitive to global business cycle and
exchange rate fluctuation. We need to move towards being investment driven
economy that is efficiency driven in the form of infrastructure development,
improving skill of work force and make that investment which translate into
tangible productivity across the board. Final stage which can make India to be
developed economy is to be innovation driven economy that can create unique
value of India at global economy level. We need to accelerate reform process that
would make economy resistant to external shocks and changes in economy cycles
and currency fluctuations. The bottom line is our policy should concentrate on
enhancing our capability in manufacturing, promote entrepreneurship and provide
incentive for innovations. We need to remember that the challenge which we are
facing is not only about currency risk but it is about moving to growth and
development.
 FINDINGS

The fall in the value of currency not only affects the pride of a nation, but also
affects a lot of economic growth indicators. Depreciation of rupee reduces the
inflow of foreign capital, rise in the external debt pressure, and also grow India‟s
oil and fertilizer subsidy bills.
The most positive impact of depreciation of rupee is the stimulation of exports and
discouraging imports and thus improving the current account deficit. But, even
after significant increase in the exports and sales in this year, Indian companies are
reporting huge foreign exchange losses due to the depreciation of Indian rupee.
This declines the overall profitability of these companies. As far as imports are
concerned, for a country such as India, imports are necessary.
Grim global economic outlook along with high inflation, widening current
account deficit and FII outflows have contributed to this fall. RBI has responded
with timely interventions by selling dollars intermittently. But in times of global
uncertainty, investors prefer USD as a safe haven. To attract investments, RBI can
ease capital controls by increasing the FII limit on investment in government and
corporate debt instruments and introduce higher ceilings in ECB‟s.
Government can create a stable political and economic environment.
However, a lot depends on the Global economic outlook and the future of
Eurozone which will determine the future of INR. As far as future of rupee is
concerned, it is expected that there will be a reverse trend with the steps adopted
by central bank but it will impact for short term only.
 SUGGESTIONS

The section tries to present certain suggestions obtained after the analysis
of the study. The suggestions emerged from the observations made on the
performance positions taken for the study.

Government should take some measures to bring FDI and create a healthy
environment for economic growth to loosen rules for portfolio investment in the
Indian market, indicating its desire to sustain external inflows.
There should be a ban on banks from taking proprietary position on currency
future or currency options.
The key to tackling the issue lies in attracting sufficient foreign flows and the
best way of doing that is to make India an attractive destination with long term
variety.

procedural hassles and creating necessary infrastructure to make it easy to do

bussiness.

More and more plans should be launched for sovereign bond issue. It will raise the
position of rupee in foreign market.
Key policy reforms such as rolling of Goods and Services Tax (GST), Direct
Tax Code (DTC), FDI in aviation and retail, Companies Bill and diesel decontrol
should be initiated properly.
Policies should be announced by govt for targeting a band for the rupee
fluctuations.
 BIBLIOGRAPHY

News papers: -
The Economic Times
Business line
Magazines:- Business World
India Today