Depreciation of Rupee Essay Example

Depreciation of Rupee Essay Example Depreciation of Rupee Essay Depreciation of Rupee Essay Kumar exhibited his profound creativity in designing a new symbol for an Indian Rupee but it failed to ignite any excitement, either in India or abroad for the simple reason that Indian Rupee is a beleaguered currency now, for it has lost its sheen over the years. A rich title for a poor currency! The value of Indian Rupee has devalued greatly since independence, notwithstanding some small measly upswings against dollar sometimes which is touted as a strengthening Rupee.The fact is that the real value of rupee has touched its nadir With every passing day Rupee is making new lows but for a common person it is not easy to understand the reason behind this steep fall and he keeps on asking himself a question Why is rupee depreciating? why indian currency is weak,  why indian currency is falling down, why indian currency is depreciating? , Dollar after being stable for a long time now is climbing back up against the rupee. What do you think? Is it the right time that politicians money from Swiss banks should be taken out or will it be really late for us?Or we start depending on our own oil resources and stop importing the yellow metal from outside? Recession is less in India, then why dollar is moving up when rupee must be strong. We all know about recession and it is worse in US and better in India, then how come dollar is appreciating with respect to Indian rupee? Dont you think that Indian rupee should go up and US dollar should move down? There are so many reasons of depreciating rupee Why dollar is moving up and rupee is going down?There has been a recent fall in rupee since some days ago and a dramatic increase in dollar. It was 49. 50, then 50. 12, 51. 10, 52. 60, 53. 54, 54. 40 and stable, and now What is the current rate of dollar? 1 US dollar = 61. 65 Indian rupees. The oil minister is going to raise petrol prices by the third quarter of this year as rupee is down again. RBI is always trying to protect rupee by selling off dollars but still has been una ble to hold rupee from falling at a rapid pace. Due to rise in dollar, gold prices have slashed down.The last resort of controlling rupee fall is issuing bonds by Reserve Bank of India. To prevent further downfall of Indian rupee, RBI is considering selling dollars directly to oil marketing firms. BODY causes Why is this happening? THE CHANGING FACE Money is not an organic creature but its value keeps changing with the society and its economic conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power. The value of a countrys currency is linked with its economic conditions and policies. The value of a currency depends on factors that affect the economy such as imports and exports, inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital, commodity prices and geopolitical conditions, says Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India), a foreign exchange brokerage. Income levels influence currencies through consumer spending. When incomes increase, people spend more.Higher demand for imported goods increases demand for foreign currencies and, thus, weakens the local currency. First Reason Dollar is in Demand BRIC countries like India have emerging economy, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing and many of them are on the verge of breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong on all statements, so to recover losses in their country, they are pulling out their investments from India.Due to this pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is raising up and rupee is depreciating. . 2. Foreign Inve stors snatching their investment out of India Foreign investors play a important in providing liquidity to capital market and boosting the economy of any country, it is similar for India also as our economy depends largely on them but foreign investment in India has decreased steeply in last year due to which value of Rupee decreases. Second reason Collapse of International TradeIf you observe in terms of international trade, commodity prices are crashing at international level. Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand is increasing against the rupee. This has not happened yet due to lack of confidence in all kind of markets. Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby decreasing demand for rupee. Fiscal Deficit – How would others feel of your financial position if you earn Rs. 100,000 a year, but end up spending Rs. 10,000 ? The excess of your expenditures over your total income is called Fiscal Deficit. In order to bridge a Fiscal Deficit, you may end up taking a loan of Rs. 10,000. The more loan you take, the more riskier you would become in the eyes of lenders. This is exactly the case in India. India is currently spending more than it earns via taxes resulting in a mounting fiscal deficit. The major brunt of this spending is going into subsidies. With mounting fiscal deficit, foreign investors start feeling uncomfortable and pull their money out of India resulting in rupee depreciation.Oil Prices – are another significant factor in putting pressure on the Rupee. Oil import contributes as the biggest percentage of India’s import. By quantity, the oil demand is increasing year on year. By prices, Oil is quoted in International Markets in US Dollars. Oil prices are current over $100 a barrel and have significantly jumped up from sub $40 levels in 2002. With the increasing price of Oil in internatio nal markets, India has to pay an increased amount of dollars to import the same quantity of oil.Further more, with an increase in the quantity of oil imported into India, a further pressure is imposed on the demand of dollars to pay to our suppliers from whom we import Oil. This increase in demand for dollars depreciates the Rupee further. 1. Difference in the demand and supply of Rupee in currency market Understanding currency market is not a rocket science, here only simple economic law works, more demand means more price for the product and less demand means less price. According to that law the demand of Rupee is decreasing hence the price of Rupee is also decreasing. Simple isnt. 2. It is a simple DEMAND-SUPPLY Phenomena.Today the demand for Dollar is higher than Indian Currency (INR). With Supply remaining the same, when demand rises, the Value also increases. Increase in Dollar value is attributed to the ongoing Crisis in US. Also USD being a prime currency for many trading commodities, the value of USD is rising. As far as decreasing value of Rupee is concerned, given the present state of Dollar Value Increase, every other currency looks weak against it, and INR is no exception. 3. Lots of scams which faded the image of India in the world    Country has seen lots of scams revealed in recent times which decreased the reputation  of the country in the world.Corruption in the country is increasing, huge negativity among the people for the Govt   has reduced the trust of Foreign Investors in India. All the bills are hanging in the Parliament. Govt is not stronge enough to take bold steps for the growth of the economy. 4. Decreasing GDP growth reduce the investment opportunities in India Before the Recession of 2008 India has maintained GDP growth rate of close to 9% for many years but things have changed now IIP numbers are lowering and even showing negative growth also the inflation numbers are scaring the growth but Govt is not able to bring any policies to restore the growth.Rising Fiscal deficit makes future more gloomy. Investors are not seeing their investment growing much here. 5. Economic problems in different countries make Dollar a better Investment Many countries are facing huge economic problems and facing financial crisis, countries like Greece, Spain are breaking. Investing in US is better option in compared to emerging markets like India where growth is slowed down which increases the demand for Dollars making then more pricey. Year| Exchange rate (rupees per US$)g| 1913| 0. 08692307692| 1925| 0. 10| 1947| 1| 1952| 5| 1966| 7. 55| 1975| 10. 409| 1980| 7. 887| 1985| 12. 69| 1990 1990-1995 This is the period when Indian economy was opened up but rupee still continued depreciating from 17 to 32. | 17. 504| 1995| 32. 427| 2000| 45. 000| 2006| 48. 336| 2007 (Oct)| 38. 48| 2008 (June)| 42. 51| 2008 (October)| 48. 88| 2009 (October)| 46. 37| 2010 (January 22)| 46. 21| 2011 (April)| 44. 17| 2011 (September 21)| 48. 24 | 2011 (November 17)| 55. 3950| 2012 (May 23)| 56. 25| 2012 (June 22)| 57. 15| 2013 (May 15)| 54. 73| 2013 (June 12)| 58. 500| 2013 (June 27)| 60. 73| 2013 (Jul 08)| 61. 21| 2013 (Aug 08)| 61. 80| Effects There was a huge interest rate differential between India and US.Now RBI is reducing all kind of rates to increase money supply in market, so deposit rates will also move downwards. It will reduce the rate differential between two countries and affect the fixed investment in India in a negative manner Current account deficit (CAD): CAD is the result of country’s higher imports than exports or where payment is higher than receipts. Gold and crude oil are the two major items In India’s import list. The more you spend on these two, the more we need to import these and more will be the demand of dollars and thus more depreciation in rupee. . Capital Account flows: Capital account flows comes in the shape of FIIs (foreign Institutional Investors) and FDI (Foreign direct In vestments). FIIs invest in Stock market or bonds and FDIs come in with Business opportunities. Looking at the country’s weak growth outlook, high inflation, high current account deficit etc. FIIs are taking their money back to their country where they are seeing more growth opportunities and also no currency risk. And FDIs are getting impacted by weak government policies, Red tapism and less parliamentary action.If both these investors come in India then demand for rupee will increase as they will bring in dollars to convert into rupees which provide stability to rupee. 3. Interest rate and inflation: High interest rates (as in India) attract foreign investors as they get less rate of interest in their own country , but high interest rates hit local industry and their cost of capital increases. High inflation and interest rates makes our export costlier and thus reducing the demand of our products outside which means less exports. This in turn increases the Current Account de ficit and thus rupee depreciation.The unstable currency movements make foreign investors wary of their decision and they prefer to move out of such country. GROCERY BILL High inflation has been pinching you for more than a year now. Now, the weakening rupee has made crude oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are not for your daily consumption, they impact your finances indirectly. For instance, since India depends on imports for a large part of crude oil it consumes, a weak rupee will influence petrol and diesel prices. Fuel being directly connected with the cost of transportation, prices of goods that are transported from one part of the country to another, such as food, are bound to rise. This will have a direct impact on the household budget, says Paresh Parekh, Tax Partner, Ernst amp; Young. Fund Manager, Fixed Income, Quantum Asset Management FMCG, or fast moving consumer goods , such as soaps, detergent s, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive. The impact of rupee depreciation on the FMCG sector will be due to higher cost of imported raw materials.The companies were already facing cost pressures. The rupee depreciation has added to their woes. Pulses and oil, which account for a large part of Indias imports, will also be affected. Crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its price will add to the inflationary pressure, says Arvind Chari, fund manager, fixed income, Quantum Asset Management. FOREIGN EDUCATION For Abin Biswas (21), a B. Tech in biotechnology, an opportunity to work as a trainee intern in a Harvard-MIT joint venture project was a dream come true and a proud moment for his parents.The cost was high but Dr Anup Biswas, Abins father, decided to bear the expenses. The institute is providing him just a daily travel allowance. So, nearly all e xpenses have to be borne by us. Though the amount was huge for us, we agreed to send him as the platform he was getting was big as well, says Rinijhini Biswas, Abins mother. With the rupee weakening, the burden has increased. The rent ($378) of a room he shares with friends was Rs 17,000 (at Rs 45/$) in mid-August 2011 when he went. Now, it is Rs 19,500 (Rs 51. 52/$). A meal ($6) which cost him Rs 270 then now costs Rs 300.This means an additional food expense of Rs 1,800 per month. Abins monthly budget, roughly $1,000, has risen from Rs 45,000 to Rs 53,000, the last instalment we paid. It will be difficult for us to bear his expenses if the trend continues, says Rinijhini Biswas. Students who have taken loans to fund their foreign degree are also bearing the brunt. Education loans are usually in rupees, but as students pay their expenses in a foreign currency, the cost of education and stay has increased. For $100,000, a student had to pay Rs 45 lakh. Now, he has to shell out Rs 52 -54 lakh, depending upon the exchange rate. The cost is in a foreign currency while the borrowing is in rupees. So, the students may fall short of funds as the loan would have been taken according to the initial requirements. In such a scenario, either the students personal contribution will have to increase or he will have to ask the bank to increase the loan amount, says Ashutosh Khajuria, president, treasury, Federal Bank. JOBS AND REMUNERATION Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which is dependent on imports will have to face an increase in cost of production and operations. In order to nullify the increase, these companies will have to rationalise costs within their control. One of this will be human resources. So, either lesser number of people will be hired or the salary bill will be kept constant or reduced, says Rituparna Chakraborty, co-founder and senior vice president, TeamLease Services. However, it is a good time f or industries which earn in dollars. The information technology sector stands to gain, but global recessionary conditions may set off the impact, says Chakraborty. VACATIONSThe falling rupee is bad news for itinerant Indians and vacationers to a foreign country. Air fares are going up due to an increase in fuel surcharge. The stay will be costlier by at least 3-5%. Also, shopping can become expensive by 5%. Eating out will also be costlier by the same percentage, says Karan Anand, head, relationships, Cox amp; Kings India. BUYING A CAR The depreciation of rupee has impacted the automobile sector in three ways. First, input costs have risen as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms.Third, many have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. Therefore, more or less all auto companies will have to increase prices. We expect at least a furthe r 2% increase in prices. Maruti has already revised prices twice in last two months. Others like Hyundai, Honda and Ford that have large import content in their cars will have to soon increase prices to protect margins, says Deepak Jain, assistant VP and research analyst, Sharekhan Institutional Research. ENTERTAINMENTThe imported paperback, your favourite pizza and the latest laptop will also become more expensive. There is an increase in the cost of imported books as well as the cost of sourcing them. In most cases we are trying to absorb the increased cost, but there may be scenarios where the end-user will get impacted, says Ankit Nagori, VP, categories, Flipkart. com. Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India are not denying the impact on profitability. The depreciating rupee has had a significant impact on our capital expenditure as we im port a lot of special kitchen equipment. There has been an indirect impact too as a small part of inputs are imported by our suppliers. If the trend continues, we will be forced to pass on some burden to customers, says Vikram Bakshi, managing director and JV Partner, McDonalds India (North amp; East). Steps Prime Minister Manmohan Singh has expressed confidence that some measures being taken to tackle fiscal management will help return the Indian currency to a more stable path. The decision by the government to allow foreign investors to directly invest in Indian equity could bring some capital flows and have a positive impact on the economy and the rupee, adds Narne. The government is continuously monitoring the emerging external sector developments leading to higher CAD and rupee depreciation. (The government) has taken a slew of initiatives to boost exports and reduce imports, encourage capital flows to facilitate financing of CAD and stem the volatility in the exchange rate of the rupee