Macro economics assignment 2

Anvesha khillar

BBA-2

For an Indian economy that was already spiralling downwards, the coronavirus effect is likely to yield
few positives. However, sometimes, opportunities are born out of crisis: India benefited greatly

Where petrol and diesel rates have seen steady decline. Chemical companies can also benefit from
the drop, as do airlines that can now spend less on fuel.Likewise, a weaker rupee may be beneficial
for exports which had seen continual decline in 2019, falling for the sixth straight month as of
January. However, this depends on what is being exported: Petroleum products constituted 13.42
per cent of overall outward shipments

Recently the rupee weakened against the dollar to cross 74, the lowest it has been since October
2018, a year when it was Asia’s worst-performing currency. There is no denying the fact that the
rupee has a strong correlation with oil prices. Since India’s 80 per cent of import bill consists of this
commodity, its price heavily influences our currency rate.Oil prices reached a four-year low recently
after Russia failed to reach an agreement with fellow OPEC+ members to cut oil production by 1.5
million barrels a day in a bid to shore up the dropping prices.

The reasons were many: The takeover of Yes Bank by the RBI, coronavirus fears that have shaken
economies worldwide prompting a global stock sell-off, and uncertainty over whether the RBI would
turn to a rate cut to help counter-act the effects of the virus outbreak on the economy.This rate cut
makes it cheaper for banks to borrow from the government and by extension, for customers to take
out loans from their banks. However, banks often take time to pass these benefits on and that
earlier rate cuts had no significant impact on lending. Meanwhile, while the weaker rupee normally
makes it more expensive to import oil, the decline in global oil prices has counter-acted against this
effect. At a time when worldwide manufacturing exports are on the decline globally, India stands a
chance to benefit off of its export pricing and can get more competitive on account of a weaker
rupee. The decline of manufacturing in China can also benefit Indian industries looking to fill the
gaps in global supply chains. However, China’s decline cuts both ways as India imports significantly
from China, its biggest trading partner, and many industries rely on Chinese imports.

Not much appreciation is expected against US dollarNSE -8.26 % as rupee has been quite an
outperformer since the start of the year. Other emerging market currencies have started sliding
against US dollar and we are also joining the bandwagon. We may not see any sudden depreciation
might not be visible but we can expect the unit to go up slowly.

How will this affect Indian economy?

The impact on import and export

When dollar rises, economies that rely on imports suffer the most

Current account = Total income from exports – Total payments for imports.

When current account balance is positive, the country is called a current account surplus country. It
means that country earns more from exports than it pays for imports (like a profitable
company).When current account balance is negative, it means country is earning less from exports
and paying more for imports (like a company running in loss).The problem of India is that it’s a
current account deficit country, like a company running in loss.

The impact on businesses due to change in purchasing behavior of

customers.
If operating costs of businesses rise too steeply because of more expensive imports, aside from
cutting costs they also need to increase the prices of their products and services if they’ve to
survive.Now the problem is, when prices for something that’s not too important rise, people delay
their purchase decisions until there’s a correction in the prices. That means, if any business isn't
selling something as important as food, medicine or electricity, people can wait for it. So they stop
purchasing things like mobile phones, cars, bikes or other imported items that get costly after rise of
dollars.Now multi-national companies may definitely get support from their American parents
during this tough time, but this may wreak havoc over businesses that’re not multi-national and do
not have a parent sitting in US to take care of them. They’re bound to suffer as people stop buying,
and bound to suffer even more if they took loan in dollars or their business relies on imports.

Impact on Forex reserves of India

Government needs foreign exchange to pay for its international transactions (i.e. importing food
items from other countries). So it keeps some foreign exchange in reserve for such transactions.In
May of this year Dollar’s rally left RBI's Forex reserves poorer by $17 billion.Why? The Forex reserves
are saved in dollars, so their value must soar with the value of dollar, right?Nope actually. The
problem is that Reserve Bank of India doesn’t hold all of its foreign currency assets in dollars only –
it’s a pool of many different currencies, such as US dollar, euro, pound sterling and Japanese yen.
But still the total figure of reserves is denominated and expressed in dollars only because of dollar's
reserve status.So any fluctuations in the value of dollar against other currencies reflects in the total
reporting value.And when dollar rises, it doesn’t rise against INR only. The value of other currencies
also depreciates, which also include many currencies that RBI has held in its reserves.

Impact on outside investment

When dollar rises, or is about to rise, foreign investors start pulling money out of emerging
economies (like India) for the sake of better returns by re-investing them into dollars. This reversal of
capital back to US first of all decreases the amount of money in India (depreciating INR), and then
further fuels the price of dollar when reinvested by investors in USA. This may already be happening,
but I couldn't find enough data to put some figures here in my answer. Pardon me.

Impact on the pocket of Indian common men

As stated above, when dollar goes nuts, the imported items (or items that’re manufactured in India
but with the help of imported items) become more expensive.Crude oil: India relies on import to
satisfy a large part of its demand for crude oil, so a weak rupee will definitely influence petrol and
diesel prices.