de-valuation of the indian rupee

7/27/2019 De-Valuation of the Indian Rupee

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Depreciation of the Indian Rupee

Nishtha Sharma


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Devaluation or Deprecation?

Devaluation meansofficial(government) lowering

of the value of a countrys

currency within a fixed

exchange rate system, by

which the monetary authorityformally sets a new fixed rate

with respect to a foreign

reference currency.

Devaluation is the result of

official government action

Depreciation is used todescribe a decrease in a

currencys value due to market

forces, not government or

central bank policy actions.

Depreciation or decline of

exchange of one currency in

terms of another is due to

market forces


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India Rupee per U.S. Dollar Currency

Exchange


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Factors leading to depreciation

Continued Global uncertainty: Owing to uncertainty prevailing

in Europe and slump in international market, investors prefer to

stay away from risky investments.

Capital Account flows: Deficit countries need capital flows and

surplus countries generate capital outflows. India needs dollars to

finance its current account deficit. Institutional investors

investing in India are directly impacted by the global market

uncertainty. Thus the relation becomes a vicious cycle, thereby

further magnifying the volatility.

Lack of reforms.


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Persistent inflation: India has experienced high inflation, If

inflation becomes a prolonged one, it leads to overall worsening

of economic prospects and capital outflows and eventualdepreciation of the currency.

Interest Rate Difference: Higher real interest rates generally

attract foreign investment but due to slowdown in growth there isincreasing pressure on RBI to decrease the policy rates. Under

such conditions foreign investors tend to stay away from

investing.

Current Account Deficit: Indian exports more than it imports,

thus a depreciating currency makes its imports costlier in the

International market.


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Impact of the falling rupee on the Indian

economy

Rising import bill. India imports close to 70% of its net

fuel requirements. This means the companies importing oil

have to shell out more rupees for the same dollar invoices.

The falling rupee will lead to the inflation as it may lead

to the rise in the prices of the commodities directly or

indirectly and that will result in less purchasing power.

The depreciating rupee will add further pressure on the

overall domestic inflation and since India is structurally

an import intensive country


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The exporters gain from the depreciation of Rupee

as they get more of the local currency in exchange ofthe foreign one.

The depreciating value of Rupee is like a boon to

Indian IT sectors as it generates more than 80%

of their revenue from overseas market and this will

enhance their actual realization of revenue.

Emigrants living outside India also benefits from

this depreciation.


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Effect on

If Rupee DEPRECIATES

(For example, when US$-INR moves from Rs.50/- toRs55/)

If Rupee APPRECIATES

(For example, when US$-INR moves from Rs50/- toRs 47/-

Importers Imports become costly as foreach USD we have to pay Rs5/-more. IMPORTS BECOMECOSTLIER

Imports become cheaper as foreach USD we have to pay Rs3less. IMPORTS BECOMECHEAPER

Exporters Exporters will have higherrevenue. For exports of eachDollar, the exporter will get Rs 5higher. EXPORTERS EARNMORE

Exporters will earn lowerrevenue. For exports of eachdollar, now the exporter will getRs 3 less. EXPORTERS EARNLESS

Indians WhoWish to Goon Holidays

Abroad

For each dollar taken abroad forspending, the traveller has to payRs 5 more and thus his trip willbecome costlier. TRIP ISCOSTLIER

For each dollar he intends totake abroad for spending, thetraveller has to pay Rs3 less andthus his trip will becomecheaper. TRIP IS CHEAPER


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Steps ahead- what can be done..?

Using Forex Reserves: RBI can sell forex reserves and buy

Indian Rupees leading to demand for rupee.

Make Investments Attractive -Easing Capital Controls,capital controls could be eased to allow more capital inflows.

Measures by Government: Government should take some

measures to bring FDI and create a healthy environment for

economic growth. Key policy reforms that should be initiated

includes rolling of Goods and Services Tax (GST), Direct Tax

Code (DTC)


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Thank you

de-valuation of the indian rupee

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