group 6: at current levels of inr, rbi must aggressively support inr just as japan did with yen, in may

2011 in the face of rating downgrade.

With current levels of INR going upto 52.36 per dollar, INR is the worst performing Asian currency. Falling rupee is detrimental to the growth of the economy. India is high on inflation and regulators should step in and contain volatility. Otherwise growth is bound to suffer which is already slowing down. There may be chance for short term profitability but in the long run the fiscal deficit will go for a toss. The policies formulated by Japan have helped maintain the stability of the yen even during times when it seemed it would be affected adversely. Steps taken by Japan Noda pledged stronger market oversight and unveiled a $100 billion facility aimed at helping to weaken the yen after repeated attempts to cool the unit through market intervention, but the plan underwhelmed markets. The programme would encourage firms to exchange the Japanese currency for foreign denominated assets, with the one-year facility aimed at encouraging merger and acquisition activity to make the most of the strong unit. Japan is set to issue more bonds later this year to help finance reconstruction from the March disaster.

In addition to its structural debt problems, Japan faces a bill amounting to 15-20 trillion for recovery work following the March 11 earthquake and tsunami. Given the weak growth prospects, it is obvious that Japan will find the servicing of its burgeoning public debt very difficult. Weak INR INR touched all time low of 52.73 on Nov 22. Investors prefer safe heaven currencies like the US dollar in the present times. European banks are not willing to lend to emerging markets given the pressure in debt crisis in the Euro Zone. The increased uncertainty in the Euro Zone on account of the sovereign debt crisis has led to shifting of capital from Europe to US which has hardened the US dollar against most currencies. Should the authorities support the INR like what was done in Japan for Yen?

Against: 1. The current phenomenon has surfaced as global dynamics which create demand supply equilibrium come in to play. And, its not wise to intervene and fight the global market when we dont have enough capacity. 2. High level of inflation alone is not responsible for the continuous plunge of the Rate of INR against the USD. The rising USD demand by the oil companies is also a major reason. The Indian Oil Corporation needs $200 million per day. How can one even imagine to fight reduce this dollar demand. 3. Another monetary action, and that too aggressive may lead to a further dampening of the spirit of the industries and the economy as a whole, as it has direct negative impact on industrial output and also badly affects the industries where demand is loan driven. 4. The measures being provided by RBI would cater to only the long-term problems thus ignoring the short term problems that arise for the Indian economy. 5. Though RBI has declared measures to control the decline of the rupee, it would not be sufficient as they fail to give importance to factors such as rise in the price of oil and energy which play an equally important role in the decline of the rupee.

For: 1. Since Japan is an export driven economy, a rising Yen against the USD would always be a major problem for the Japanese economy. India being a major importer of crude oil and other many commodities, the import dependent industries may be in serious trouble as import costs would rise as the INR keeps falling continuously. So, some efforts on the part of the RBI to curb the USD/INR demand-supply disequilibrium would be a welcome step. 2. FIIs have been flowing out of the nation and measures to contain flight of capital needs to be taken. 3. Relaxed rules on currency swap hedges have also been introduced so as to reduce the effect of the volatile currency market. This helps to bring about a stable performance without the fear of losing too much due to constant change.

Our Opinion The weak INR definitely needs support of the regulatory authorities. In the long run the economic growth can be sustained through the measures taken by the authorities. In the long run the deficits would go topsy turvy otherwise. Only with the support of the regulatory authorities can any order be brought in the economy and the weak INR.

The RBIs directive to the Indian companies to bring back the offshore funds raised through External Commercial borrowings (ECBs), so that they can be parked with Indian banks can prove to be helpful. The RBI has increased interest rates on foreign currency deposits which would definitely attract more deposits provided the lucrative offer. As deposits improve so does the foreign exchange reserve, which can help in improvement of the rupee performance. RBI is looking at the currency depreciation only from a macro perspective and intends to intervene only if the macro environment seems to be adversely affected. Ignoring the micro environment could lead to new levels of inflation. Control measures should be taken at both the micro and the macro levels.

What RBI should do is take the help of big corporations and exporters. As has been seen that the sale of USD by these parties had led to the rupee closing at 29 paise higher on 24th Nov.

Submitted by:

1020046 ITI MEHROTRA 1020157 SMRATA SINGH 1020124 PRABHU KUMAR B 1020056 SMITA GARG 1020125 PRASHANT SHOURYA 1020007 ANISH SINGH