assocham exchange rate study
TRANSCRIPT
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Exchange Rate Slide
What Impact Is It Having
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I. Falling Rupee and Its Impact
Since the current round of global uncertainties started after the downgrading of USA and the
increasing threat perception of a Greek default, the rupee has been depreciating. Earlier as well,
the rupee has been unsettled whenever the global economy showed signs of trouble as in 2008. A
look at the pattern of rupee in comparison to the four major currencies shows that since April
2011, there has been a depreciation trend that is much more visible. (Fig 1)
Fig 1 Exchange Rates
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Such wild fluctuations in the rupee exchange rate within a short span of time are unsettling and
leaving its imprint on the rest of the economy. The depreciating rupee will add further pressure
on the overall domestic inflation and since India is structurally an import intensive country, as
reflected in the high and persistent current account deficits month after month, the domestic costs
will rise on account of rupee depreciation. The rupee depreciation will particularly hit the
industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and
minerals, imported industrial intermediate products all are getting affected.
A. Impact on Oil Imports
Oil imports consume he largest part of the forex reserves. A depreciating rupee is bound to offset
the decrease in the international prices of commodities such as oil. As can be seen from the
figure below although the oil price per barrel has fallen however the depreciating rupee has not
given any respite to the importer as they actually have to shell out more money in order to
On the basis of ASSOCHAMs
interactions with market players, there
could be two possible scenarios:
Scenario 1: If the global recovery does
not take place and the pattern of flow of
funds away from the Indian economy
continues as it has done in the recent
months the exchange rate could well
reach the levels of 53.8 in January 2012
and 55.1 in March 2012.
Scenario 2: If global economies areable to recover and the funds start to
flow again into the Indian markets then
the exchange rate would settle for
somewhere around Rs 49.50.This would
also be the new normal level of
exchange rate.
USDollar
PoundSterling Euro Yen
2011
Jan 45.4 71.5 60.5 55.0Feb 45.4 73.3 62.1 55.1
Mar 45.0 72.7 63.0 55.0
Apr 44.4 72.7 64.3 53.3
May 45.0 73.4 64.3 55.4
Jun 44.8 72.7 64.5 55.7
Jul 44.4 71.7 63.2 56.0
Aug 45.5 74.4 65.4 59.0
Sep 47.6 75.2 65.5 62.0
Oct 49.3 77.6 67.7 64.2
Nov 52.7 81.4 69.9 67.3
Dec 53.1 81.8 70.3 69.2
2012
Jan 53.8 82.1 71.8 70.5
Feb 54.5 83.4 72.5 72.6
Mar 55.1 85.8 73.7 74.4
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purchase the same quantity of oil.Take for instance crude oil imports. Brent crude oil price was
$118.46 per barrel on April 2011 when exchange rate for the rupee was Rs 44.4 to a dollar. On
November, oil price had gone down to $109.03 per barrel and exchange rate was Rs 52.7 to a
dollar. Thus, because of the rupee depreciation not much benefit can be derived out of the loweroil price.Instead, the increase in price of importing oil between April and Novemebr is to the
tune of Rs. 489.8 per barrel. (Fig 2)
Fig 2 Oil price and Exchange Rate
Source: RBI
B. Impact on Debt
A depreciating rupee is not only impacting the import bill it has also severly affected the cost of
borrowings for the corporate sector. As was reported recently1
Indian companies have borrowed
close to $29 billion in foreign currencies, through ECBs (External Commercial Borrowing) and
FCCBs (Foreign Currency Convertible Bonds), since the beginning of this year, The corporates
had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to
save costs arising out of higher interest rates and liquidity constraints within the country, but the
subsequent fall in the rupee value has negated the benefits. The report suggested that a sharp fallof about 17 per cent in the value of rupee from near Rs 44-level against the US dollar at the start
of 2011 to below Rs 51-level currently has made the cost of repaying these foreign loans costlier
by a similar margin.
1http://www.livemint.com/2011/11/20151513/Rupee-fall-may-make-India-firm.html
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For instance an Indian company would now need to pay an amount of about Rs 5,134 crore
(based on current rupee value of Rs 51.34 per US dollar) towards the principal amount to a
bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400
crore at the beginning of 2010.
The falling value of rupee may make the foreign loans availed by the Indian companies this year
costlier by an estimated over Rs 25,000 crore (about $five billion), if the current currency
valuations persist.
External Debt Scenario
As per the latest data made available by RBI, Indias external debt, as at the end-June 2011, was
placed at US$ 317.0 billion recording an increase of US$ 10.5 billion or 3.4 per cent over the
end-March 2011 level primarily on account of increase in commercial borrowings, short-term
trade credits and NRI deposits.
The external commercial borrowings and short term trade credits accounted for 70 per cent of the
rise in total external debt over the quarter broadly reflecting the surge in imports. NRI deposits
and multilateral borrowings accounted for about 20 per cent of the increase in total external debt
(Figure 3).These are certain payments for which funds need to be kept at hand always.
Fig 3 External Debt Outstanding US $ Billion
Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*
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Government (Sovereign) external debt stood at US$ 78.7 billion as at end-June 2011 as against
US$ 67.1 billion as at end-March 2010. The share of Government external debt in the total
external debt at 24.8 per cent at end-June 2011 declined marginally over end - March 2011 (25.5
per cent). On the other hand, the share of non-Government debt in total external debt rose duringthe quarter to 75.2 per cent from 74.5 per cent (Figure 4).Therefore what this could mean is that
maybe Indian corporates might have gone in for cheaper loans from foreign avenues which now
would have become expensive owing to the depreciating rupee.
Fig 4 Government and Non-Government External Debt inpercentage
Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*
Another key element to be noticed in the external debt picture of India is the exposure of debt in
terms of various currencies. The data suggests that the US Dollar denominated debt continued to
be the largest with a share of 54.2 per cent in the total external debt as at end-June 2011. The
share of Indian rupee in the total external debt stock accounted for 19.2 per cent as at end-June
2011 followed by Japanese Yen (11.1 per cent), the share of Euro accounted for3.7 per cent as at
end-June 2011 (Figure 5).Now here again the depreciation of rupee is bound to increase the
interest payments as indicated earlier that since April until November 2011 there has been an
16.54 per cent depreciation.
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Fig 5 Currency Composition of External Debt inpercentages
Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*
As indicated in the table below (Table 1) unlike the case is with China where they have foreign
reserves to the tune of 3 trillion dollars the foreign reserves in Indias case were just about
equivalent to the external debt at the end of June 2011 period.
Table 1: Indias External Debt and the ratio of Foreign Reserves to the Total External Debt
External Debts (US $Billion)
Ratio of foreign Exchangereserve to total External Debts
2007-08 224.4 138
2008-09 224.5 112.2
2009-10 261 106.9
2010-11PR 306.5 99.5
end-June 2011P 316.9 99.6Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*
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I. Effect of a Depreciating Rupee
Finally to somewhat understand the effect of depreciating currency on the external debt figures
Table 2 has been tabulated taking an assumption that figures for various heads as given in theend of June 2011 period were the same for November 2011 and shows what shall be the effect on
each parameter due to the depreciating rupee. Therefore we can see that the depreciating rupee
has had the serious effects upon the external debt figures of the nation.
Table 2: Effect of Depreciating Rupee on the External Debt Composition of India (inRupees Billion)
Total External DebtEnd June-2011 End Nov-2011 Change
Government Debt 3525.7 4068.7 543.0
Non-Government Debt 10672.5 12316.2 1643.8
Total External Debt 14198.2 16384.9 2186.8
Currency Composition of Debt
US Dollar 7695.4 8880.6 1185.2
SDR 1348.8 1556.6 207.7
Indian Rupee -------- -------- ---------
Japanese Yen 1576.0 1818.7 242.7
Euro 525.3 606.2 80.9
Pound Sterling 241.4 278.5 37.2
Impact of a depreciating rupee:
Total external debt has increased by Rs. 2186.8 billion for the period June 2011
to November 2011.
The currency composition for major currencies has also had an impact due to
this depreciation. The debt in U.S dollars has increased by Rs. 1185.2 billion,
that in Japanese Yen has increased by Rs. 242.7 billion.
In terms of the three major components of external debt the changes in External
Commercial Borrowings, NRI Deposits and Short term Debts have been Rs.
643.2, 365.0 and 472.5 Billion respectively.
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Others 85.2 98.3 13.1
Sum of Currency Composition of Debt 14198.2 16384.9 2186.8
Components of External Debt
External Commercial Borrowings 4176.3 4819.5 643.2NRI Deposits 2369.8 2734.8 365.0
Short-Term Debt 3067.6 3540.1 472.5
Key Components of External Debt 9613.7 11094.4 1480.7June Exchange Rate taken as 44.4November Exchange Rate taken as 51.7
II.Why is the Rupee Falling
Moving on, let us try and understand as to how the crises in the U.S. and European region might
also be leading to this heavy depreciation in rupee. We shall try and do so by looking at the
trends in Net FIIs. In the light of uncertainty and fall in global stock market, foreign
institutional investors are supposed to be pulling out their money from various EMEs (Emerging
Market Economies) and taking them back to their home countries in order to sustain themselves.
As can be seen from the figures below since April barring the month of September we can see
that whenever there has been a fall in the Net FIIs the exchange rate has depreciated
considerably. (Fig 6)
Fig 6 Net FII and Exchange Rate
Source: SEBI
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Table:3Trends in FII and Exchange Flow
Net FII Exchange Rate
Apr 7196.1 44.4
May -4276.0 45.0
Jun 4883.3 44.8
Jul 10652.9 44.4
Aug -7902.5 45.5
Sep -1865.7 47.6
Source: SEBI
III.Comparative Exchange Rate movements in EMEs
To understand whether this phenomenon of depreciating rupee is a standalone case for India the
study has tries to look at the currency trends of six other nations vis--vis the U.S dollar. The
countries considered were China, Brazil, South Africa, India, Mexico and Russia. The trend
seems to suggest that almost all the nations have seen their currencies depreciating since May
2011 barring China which has shown currency appreciation in the given period. (Fig 7) Assuggested by the trend lines amongst the nations considered South Africa has seen the highest
level of currency depreciation, followed by India. (Table 4) Thus there is reason to believe that
the crisis prevalent in the west is affecting almost all major economies worldwide.
Key Observation
Indian financial market index (BSE index)
indicates a declining trend from April 2011 to
November 2011. The falling index is partially an
indication that FIIs are selling out, this would
further increase the pressure on rupees.
BSE Index
Bse Index
Apr 19,463.11May 19,224.05
Jun 18,527.12
Jul 18,974.96
Aug 18,352.23
Sep 16,963.67
Oct 16,255.97
Nov 15,822.28Source: SEBI
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Fig 7 Comparative Exchange Rate movements in EMEs vis--vis U.S Dollar
Appreciated by 2.67 per cent
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Table 4: Exchange rates of Nations vis--vis U.S DollarBrazilReal
MexicanPeso
South AfricaRand
RussianRuble
ChinaYuan
IndianRupees
Apr 1.59 11.72 6.73 28.06 6.53 44.4
May 1.61 11.66 6.86 27.92 6.50 45.0
Jun 1.59 11.81 6.79 27.98 6.48 44.8
Jul 1.56 11.67 6.79 27.91 6.46 44.4
Aug 1.60 12.24 7.09 28.81 6.41 45.5
Sep 1.74 13.04 7.56 30.73 6.39 47.6
Oct 1.77 13.45 7.97 31.25 6.37 49.3
Nov 1.78 13.67 8.19 30.83 6.36 51.7Source: http://www.exchangerate.com/past_rates_entry.html
IV.Should RBI Intervene ?
The persistent decline in rupee is a cause of concern. Also there have been of lately suggestions
made that, some intervention from the Reserve Bank could become a critical stabilising factor.
Indeed, Reserve Bank had earlier intervened at times when the rupee was appreciating to protect
the interests of Indian exports. So, the demand is why not when the rupee is depreciating.
However looking at all the above factors the magnitude of external debt, the currency
composition of the debt as well as the continuous depreciation of the rupee makes one wonder
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whether the RBI should put extra burden on its existing foreign reserves on order to check this
exchange rate fluctuation.
V. Suggestions What the authorities can do, other than direct intervention
Oil import demand could be staggered and purchases co-ordinated so
that at no point there is undue bundling of imports.
The government can take initiatives which encourage and increase the
flow of foreign investments into India. Three recent steps taken by the
government be it the pension fund FDI limit or the increase in the
investment limit investors in government security and corporate bonds
are the steps in the right direction.
The government can make investments attractive and invites long term
FDI debt funds in infrastructure sector.
Government can consider temporary import compression.
FDI in the aviation industry, retail can also attract foreign investors.