FIRST SEMINAR

ON

PRESENTED BY

PRADEEP L M

PGS12AGR5751

MAJOR ADVISERDR.G N KULKARNI

(ASSO.PROF.DEPT OF AGRIL ECONOMICS ,AC DHARWAD)

CONTENTS

• Introduction

• Brief history of Indian rupee

• History of devaluation

• Exchange rate mechanism

• Causes of devaluation of Indian rupee

• Implications of devaluation of Indian rupee

• Policy options with RBI to control devaluation of rupee

• Role of GOI to control rupee devaluation

• Conclusion

INTRODUCTION

• Devaluation means decreasing the value of nation's currency relative to gold or the currencies of other

nations.

• In common modern usage, it specifically implies an official lowering of the value of a country's currency

within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate

with respect to a foreign currency.

• For example, Rs 25= 1 $.

Rs. 30 = 1$

• Devaluation is usually undertaken as a means of correcting a deficit in the 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

Main objectives of devaluation

1. To encourage exports

2. To Discourage the imports

3. To correct the balance of payment

History of the rupee

India was one of the first issuers of coins (6th Century BC)

The word rūpya is derived from sanskrit which means "a coin of silver“

The silver coin remained in use during the Mayura,Mughal Era, Maratha Era as well as

in British India.

Acute shortage of silver during the First Word war, led to the introduction of paper currency

Among the earliest issues of paper rupees include; the Bank of Hindustan (1770–

1832), the General Bank of Bengal and Bihar (1773–75), and the Bengal Bank (1784–91).

The rupee was subdivided into 16 annas.

Each anna was subdivided into either 4 paisas.

So One rupee was equal to 16 Annas, 64 Paises.

In 1957, decimalization occurred and the rupee was divided into 100 Naye Paise.

After a few years, the initial "Naye" was dropped.

Stainless steel coinage of 10, 25 and 50 paise, was introduced in 1988 and of one

rupee in 1992.

Udaya Kumar Dharmalingam, the man who designed the rupee symbol

Launched on 8 July 2011

HISTORY OF RUPEE DEVALUATION

• In early controlled exchange rate

regime, with respect to USD, the rupee

exchange rate was around Rs 4.00 in the

1950s, Rs 5.00 in the 60s, Rs 7.00 in the

70s, and Rs 8.00in the 80s.

• In the era of 90s, the rupee moved to Rs

20s and Rs 40 in the next decade of 2000.

• During this period, the Government had

declared two major devaluation in the year

of 1996 and 1991.

• The rupee was devalued first in 1966 by

57% from Rs 4.76 to Rs 7.50 against the

US dollar.

• In the year 1991, the rupee was again

devalued by 19.5% from Rs 20.5 to Rs

24.5 against the US dollar

The 1966 devaluation was the result of the first major financial crisis the

government faced due to:

•Continued trade deficits

•The Indo-Pakistani War of 1965

•US and other countries friendly towards Pakistan to withdraw foreign aid to

India

•The drought of 1965/1966 which resulted in a sharp rise in prices.

.

1991 Economic crisis

The trade deficit in 1991 was US $9.44 billion

The current account deficit was US $9.7 billion

The gulf war led to much higher imports due to rise in oil prices.

Cost pull inflation

Political and economical instability

Depleting foreign exchange reserve

2013 Devaluation

India's Currency, The Rupee, Has Plummeted To A Record Low Against The Dollar.

(Indian Rupee = American Dollar)

* 2013 (Aug 28)

YearExchange rate

(INR per USD)

1947 4.79

1966 7.5

1975 8.39

1980 7.86

1985 12.38

1990 17.01

1995 32.42

2000 43.5

2005 (Jan) 43.47

2006 (Jan) 45.19

2007 (Jan) 39.42

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) 55.39

2012 (June 22) 57.15

2013 (May 15) 54.73

2013 (Aug 28) 68.83

2013 (Dec 6) 61.68

Exchange Rate Mechanism

All economies that interact with international economy can be broadly classified into three

categories on the basis of exchange rate policy of the country.

1. Fixed Exchange Rate

2. Floating (or free) Exchange Rate

3. Hybrid system

Fixed exchange rate

• Economies peg the value of their currency with some other prominent currency like US dollar.

• This of exchange rate regime is maintained by generally smaller economies like Nepal and Bhutan (pegged to Indian Rupee) or several African nations.

Floating exchange rate

• Exchange rate is

determined by demand

and supply of the

currency.

• Economies like

US, UK, Japan etc

Hybrid system

• Most midsized economy

like India practices a mix of

both these regimes

Indian rupee and its exchange rate historically

Exchange rate of the Indian rupee

How does government control exchange rate?

• control is exercised by

actively participating in

international currency

market through its

central bank (Reserve

Bank of India or RBI in

our case)

Continue…………

• Suppose there is huge demand of rupee in India which is driving the value

of rupee.

• Also, let’s assume that RBI is comfortable only in range of Rs 50 to Rs. 60

per US dollar.

• This rapid surge in th e demand of rupee which might be because of

a. Indian export is far more than its import,

b. foreign investors want to invest in India

c. large number of Indians earning abroad are remitting their money back

home

All these together pushing the exchange rate below Rs. 50 per dollar.

Contd……….

• The RBI will then step in the market and will offer Rs.50 for each dollar.

• Soon other traders will have to arrive at this rate, if they want to participate

• Since RBI has the ability to print currency notes, it can keep the lower

limit of exchange rate fixed at this value

• When demand for rupee is subsided, RBI will step back and let market

determine the exchange rate.

• In the process, RBI will have accumulated a pool of dollars; this is called

forex reserve or foreign exchange reserve

Contd……..

• Let’s assume that exports have dwindled, imports are on surge, foreign

investors are fleeing Indian market and remittances are at all time low.

• Now, everyone wants dollar but there is little supply.

• This will drive the price of dollar up. It’s about to breach the upper limit of

Rs. 60/ USD

• RBI will step in again and will put its dollar reserves on sale at the rate of Rs.

60/ USD. This will stop the further depreciation of rupee

• Finally, as you can see, in order to be able to stop the currency from

appreciating, RBI will have to print money and for preventing its depreciation

it needs a reserve of dollar

MAJOR REASONS BEHIND FALL IN THE VALUE OF INDIAN

RUPEE

• Demand Supply Rule

• Dollar gaining strength against the other currencies

• Mounting Current Account Deficit

• Increased import

• Inflation

• Corruption and Political Instability

• Mounting Demand of Dollar

• High Government Deficit

• Mounting Trade Deficit:

• Outflows of Foreign Capital:

• Lower Inflows of Foreign Capital

• Oil Prices

• Rupee Speculation

A graphical representation of the causes and repercussions of the

Rupee downfall

Mounting current account deficit

• Current account deficit indicates the

status on trade between a country and

the rest of the world

• The deficit was registered $74bn during

the year in 2011-12 and to $87.8 in

2013

• Which was $46bn in the year 2010-11

• Gold imports, hefty oils bills and

decreasing exports due to global

slowdown leads to higher current

account deficit

• The euro zone, one of India's major

trading partners is under a severe

economic crisis leads to reduced exports

• Thus India record a CAD of around

4.9%, depleting its forex reserves and

depreciating the rupee

source: Directorate General of Commercial Intelligence and Statistics

Export -import

YEAR EXPORT IMPORT

2005-6 103090.5 149166.0

2006-7 126414.1 185735.2

2007-8 162904.3 251439.2

2008-9 185295.0 303696.3

2009-10 178751.4 288372.9

2010-11 251136.2 369769.1

2011-12 305963.9 489319.5

2012-13 300570.6 491487.2

Source : Directorate General of Commercial Intelligence and Statistics

(US $ million)

0

100000

200000

300000

400000

500000

600000

2005-6 2006-7 2007-8 2008-9 2009-10 2010-11 2011-12 2012-13

EXPORT

IMPORT

(US $ million)

Source : Directorate General of Commercial Intelligence and Statistics

Inflation

• High inflation rate leads to

decrease in purchasing power of

money

• High inflation rate compared to

other country will leads to

increased import than the export.

• A fall in purchasing power due to

inflation reduces

consumption, hurting industries.

Corruption and Political Instability

• A series of corruptions cases are

being observed which has

reduced confidence among

investors.

• Lack of firm initiative by

government on issues like

allowing FDI in retail.

Mounting Demand of Dollar

• Due to instability in European markets

• Oil, gold and metals are all of a sudden

being dumped in favor of the dollar

• Shift of FII’ (foreign institutional

investors) from the Indian markets

Trade deficit

• India imports more than it

exports

• India's trade deficit in the 2011-

12 fiscal years is seen at USD

185 billion,

Mounting trade deficit

year Export Import Trade balance

Outflows of foreign capital:

• This is burning issue in Indian

economy at present.

• Due to global uncertainty and various

economy crises like Europe sovereign

debt problems,

• FII withdrew over $4 billion from

India in 2011; against an inflow of

$1.35 billion in 2010

Lower inflows of foreign capital

• Further the uncertainty and delay in our

commitment to economic reforms, retrospective

taxes, and policy paralysis within the government

have created a fear in mind set of global investor

resulting into decline of foreign investment

• RBI figures exhibit that they stood at $62 billion

in financial year 2007-08,

• Dropped to $28 billion during the year of global

crisis 2008-09,

• then bounced back to $70.1 billion in 2009-10,

• $64.4 billion in 2010-11

• And close to $60 billion during the first 11

months (April-February) of 2011-12

Rupee Speculation

• It refers to the flow of funds (or capital) from

one country to another in order to earn a

short-term profit on interest rate differences

and/or anticipated exchange rate shifts.

• Once currency traders and speculators realize

that India's central bank is unable to manage

its exchange rate, and reduce the adverse

impact on its currency, they may enter the

market in a big way to sell the rupee.

• As a result, the rupee may devalue more than

it should.

Implications of devaluation

• Increased export and less import

• Impact on foreign investors

• Higher inflation

• Increase in cost of borrowing:

• Increase in fiscal burden

• Increase in the import bill

• Impact on importers and prices of goods

• On thermal coal imports

• On fertilizer imports

• On companies and consumers

Increased export and less import

• Fall in the value of rupee makes

exports cheaper and imports

expensive.

• The various sectors like petroleum

and petroleum products, engineering

goods drugs and pharmaceuticals –

which have import inputs of as much

as 75-77 percent, 19-21 percent and

17-19 percent , respectively (as per

report of associated chambers of

commerce and industry of India) lead

to a strict dent on their income due to

fall in the value of rupee.

Impact on foreign investors

• When foreign investors

invest in Indian stock

market, they make a loss if

it depreciates and may earn

profit if rupee appreciates

Higher inflation

High inflation and uncertainty about

future inflation discourage investments

and savings.

As high inflation raises uncertainty in

the economy, it also leads to lower equity

values.

Increase in cost of borrowing

• Interest rate differentials in

domestic and global markets

encourage the industry to raise

money through foreign markets

however a fall in the rupee value

would negate the benefits of

doing so.

Increase in fiscal burden

The central government fiscal burden might

increase as the hike in the prices of imported

crude oil and fertilizer might warrant for a

higher subsidy provision to be made for these

commodities.

Impact on

Effect On Rupee depreciates Rupee appreciates

Importers Imports become costlier and

hence importers lose

Imports become cheaper and

hence importers gain

Exporters Realization from exports

increase and hence exporters

gain

Fall in export realization to the

extent of forex difference and

hence exporters lose

Foreign travel Trip becomes costlier Trip becomes cheaper

Increase in the import bill

Case A: Import bill valuation using

prevailing exchange rates for the

Respective months

Case B: Import bill valuation using April

2011exchange rates for the respective

months

Month Month Value of

Import(Rs. Crore)

Month Month Value of

Import(Rs. Crore)

April 2011

(Rs 44.4/USD)

160536.6 April 2011

(Rs(44.4/USD)

160536.6

December 2011

Rs 52.8/USD)

226535.0 December 2011

Rs 44.4/USD)

190495.8

Increase in Import

Bill

65999.0 Increase in Import

Bill

29959.2

Note: Exchange rate during the April (44.4) and December (52.8)

Source: ASSOCHAM’s calculation

Import bill of crude oil

Case A: Import bill valuation using

prevailing exchange rates for the

Respective months

Case B: Import bill valuation using

April 2011exchange rates for the

respective months

Month Month Value of

Import(Rs.

Crore)

Month Month Value of

Import(Rs. Crore)

April 2011 57700.0 April 2011 57700.00

December 2011 63376.7 December 2011 53294.10

Increase in Import

Bill

5676.70 Decrease in Import

Bill

4405.90

Note: Exchange rate during the April (44.4) and December (52.8)

Source: ASSOCHAM’s calculation

Impact on DAP fertilizer price

Commodity Period Price $/mt Exchange

Rate

Price Rs

Fertilizers

(tonnes)

April

2011

610 45.0 27450

Nov

2011

631 45.0 28395

Difference 21 0.0 945

Source: ASSOCHAM’s calculation

Commodity Period Price

$/mt

Exchang

e Rate

Price Rs

Fertilizers(t

onnes)

May

2011

610 45.0 27450

Oct

2011

631 52.7 64241

Difference 21 4.3 3658.3

On thermal coal imports

Commodity Period Price $/mt Exchange

Rate

Price Rs

Thermal

Coal

(Tonnes))

April 2011 127.60 45.0 5739.50

Nov 2011 121.90 52.7 6424.10

Difference 9.43 8.3 684.60

Source: ASSOCHAM’s calculation

Impact on Common Man

Imported goods:

Fuel price:

Tourism:

Students studying abroad

Impact on infrastructure

• Around 15 per cent of the borrowings of

infrastructure companies have been in dollar

terms

• Increased the price of construction equipment

and building materials results in enhanced

project execution cost.

• Increasing costs of inputs like steel and cement

are also affecting infrastructure building.

• Fresh investments in infrastructure could also get

over priced

Impact on Agriculture

Sugar :

• India, the world’s second-biggest producer of

the sweetener.

• A softening rupee will be advantage for exporters

from India.

Wheat:

• India is world’s largest producer of wheat.

• Fall in the rupee will lift margins for Indian wheat

exporters.

Rice & Edible oil:

• India is the world’s second-biggest rice producer

• Fall in the rupee will lift margins for Indian rice

exporters.

Contd………….

• India is the world’s top buyer of edible oil.

• imported oils like palm and soy have risen in local markets.

Pulses:

• Despite holding the tag of the world’s biggest producer of lentils, India is also the

largest importer of lentils as rising domestic consumption outpaces harvests.

Cotton:

• Fall in the rupee will lift margins for Indian rice exporters.

Impact on real estate

• Real estate sector is a second largest

employment generator after agriculture as

demands of property declining it not only affect

economy.

• increases the project cost and time frame

followed by the increased in the prices of raw

material, transportation, wages and salary of

labor, engineers, import of construction

equipment etc , outsourced services in form of

design consultancy, architects

• Higher Inflation rate and weak economic

condition make unfavorable climate for investor.

On banking sector

If an Indian company defaults on its dollar debt

and goes bankrupt then it will have a contagion

effect on all the banks that have lent to that

company.

The other adverse affect is that the liabilities on

NRE and foreign currency deposits may increase

because of the depreciation in rupee.

A positive impact for banks of the currency

depreciation this year is that RBI raised interest

rate ceilings on foreign currency deposits of

Indian banks

Devaluation is good or bad ?

• it creates an imbalance on the

Balance of Payments especially for

import driven economies

• country like India which imports

majority of essential commodities

like Oil, pays much more in terms

of the value in INR imports get

expensive thereby increasing the

CAD. This will further devaluate

the currency

• This is a welcome change for a

company which is into the export of

goods or services

Conditions for the success of devaluation

1. More than unity elasticity of demand for exports and imports

2. Sufficient supply of exports

3. Stable international price level

4. Non-competetive devaluation

5. Counter-devaluation measures

6. Spirit of sacrifice by the people

Solution?

1 .Allow free flow of foreign investment for the development of infrastructure

and manufacturing sector.

2. Restrain / discourage import of non essential and luxury items

e.g. auto sector imports..

3. Restrain /discourage export of agricultural produce and basic minerals

e.g. iron ore.

4. Promote aggressively exports of manufactured goods like China

5. Promote migration of skilled personnel / work force from India..

6. Facilitate the voluntary return of the funds parked outside India.

What Indian Government Can do, to Bring back Positive Vibrations in Indian Economy?

Contd……

7. Reduce / cut unnecessarily expenditure of governmentinstitutions

8. Government should observe restraint in offeringfinancial aid to other countries.

9.To balance demand & supply

10.Proper implementation of monetary policy and fiscal

policy in our country

11.Stability in imports & exports etc.

Policy options with RBI to control devaluation of rupee

• Raising Policy rates

• Using FOREX Reserves

• Easing Capital Controls

• Administrative measures

conclusion

Even after taking few measures by government , rupee depreciation

has abated but it still remains under pressure.

Both domestic and global conditions are indicating that the

downward pressure on Rupee to remain in future.

Thus, RBI should continue its policy mix of controlled intervention in

forex markets and administrative measures to curb volatility in Rupee.

Apart from RBI, government should take some measures to bring FDI

and create a healthy environment for economic growth.

We invented money and we use it, yet wecannot understand its laws or control itsactions. It has a life of its own”

-Lionel Trilling