ASSIGNMENT OF BUSINESS

ENVIRONMENT

ECONONICS FOR ENGINEERS (ECO-310)

TOPIC: THE IMPACT OF APPRECIATION OF INR AGAINST

US DOLLAR

SUBMITTED TO : SUBMITTED BY :

HARNEET KAUR RAM KISHOR SINGH(B-50)

PARWARISH (B-49)

DILRAJ(B-51)

ACKNOWLEDGEMENT

Gratitude cannot be seen or expressed. It can only be felt in heart and is beyond description. I owe a dept of gratitude towards my ECONOMICS MAM HARNEET KAUR who helped and guide me at every step. The topic given to me by her THE IMPACT OF APPRECIATION OF INR AGAINST US DOLLAR is very interesting and knowledgeable too. Really I had come to know many facts about APPRECIATION OF INR AGAINST US DOLLAR While making the term paper this is highly knowledgeable. Without mams support and proper guidance this term paper would come into effect and played a major role in shaping this term paper each topic she had guided me reflects her intelligence and command over the subject I would also like to thanks my friend who had supported me while making this projects and all their efforts to make this term paper an effective one.

INTRODUCTION

Rupee is posing a unique set of challenges for the Indian

economy. The impact would not be limited to macro

economy alone but it will also affect down to the level of

firms under various sections of economy. This is

conceptual study based on Rupee The rupee has

depreciated by more than 18 percent since May 2011,

moreover with The rupee breaching the 53 dollar mark,

profit margins of companies that import commodities or

components would come under severe pressure, which

could result in price increases for the consumer. 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.

Although the prices of most of the imported commodities

have fallen, the depreciating rupee has meant that the

importer gets no respite as they need to pay more to

purchase the same quantity of raw materials. The

depreciating rupee would keep the price of imported

commodities elevated. Thus the industrial sector is bound

to get adversely hit the appreciating Dollar relationship in

terms of Rupee appreciation that is dollar depreciation and rupee depreciation that is dollar appreciation.

To better understand the fluctuating dollar value against the rupee, let us get to know some basics:

Exchange rate - the rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another.

Foreign exchange market - Also known as Forex or FX. It is a market to trade currencies

Indian foreign exchange rate system - India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply

exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar.

Why is the US dollar walking down? - When it comes to the US being a consumer, it has one of the largest appetites in the world. To keep up its demand for consumption, its imports are huge when compared to exports. This created pressure since there were more payments in dollars than receipt of any other currency, which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. This resulted in the depreciation of the dollars value, which again caused more outflow of dollar for import payments. This created a state of inflation and made consumables costlier to US. To control inflation US resorted to increase in interest rates to cool down pressure on demand side of consumption. This factor along with recession in all other sectors, particularly real estate, is causing the mighty US dollar to shake.

Impact of dollar fluctuations on the Indian economy..... Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last long because the oil rise in the 1970s and 80s created a big gap in Indias balance of payment. Balance of payment (BOP) of

any country is the balance resulting from the flow of payments/receipts between an individual country and all other countries as a result of import/exports happening between an individual country, in our case India and rest of the world. This gap widened during Iraqs attempt to take over Kuwait. Thereafter, exports also contributed to FX reserve along with Foreign Direct Investment into the Indian economy and reduced the BOP gap

Indian rupee appreciation against dollar impacted heavily to the following: Exporters Importers Foreign investors Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the

worlds largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48,was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get onlyRs. 3935. This difference is towing away the profit margins of

exporters and BPO service providers alike. Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation.Foreign investment into India is also contributing

well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like - Foreign investment of up to 51% equity in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital withexception for Indian nationals who were allowed to do so only under special circumstances; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate.

Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. Can the Dollar remain king or not, is no longer a million dollar question, but a million Rupee question!

The Indian Rupee (denoted by INR) has appreciated 10% against major currencies of the world in less than three months and it's at an all time high in last 9 years. That was a serious cause of worry for RBI for the reason the "Herd Effect" such sudden appreciations bring along. (Herd means action without planned direction).......... First let's have a look at the dynamics of currency movement.

Just like any other commodity, the currency of any economy is based on dynamics of supply and demand, and its value depends on trading in currency exchanges all over the world. Higher the demand for a currency on an exchange, the stronger it becomes and vice versa. However, for currencies like INR which are not traded on exchanges, the value depends on capital inflows in the country. These capital inflows can be in the form of : -

Foreign Direct Investment Portfolio Inflows (Foreign Investment in Equity) External Commercial Borrowings by Indian Companies Abroad Remittances to India by Non-Resident Indians

Since the Indian Economy and the Indian Stock Markets have been on a roll, the capital inflows to India has been pretty strong which has primarily led to the appreciation of INR. Implications of Rising Indian Rupee First and foremost, the appreciating Rupee puts pressure on export competitiveness of any economy. The exporters earn their income in dollars which is spent in Rupees back home for further

investment or consumption. If the Rupee appreciates (taking their dollar earnings to be same), the earnings in Rupee terms fall. To explain it better. Say that exchange rate is US 1 $ = 50 INR. If an exporter X earns US $ 1000 by exporting his goods/services to US, his earnings in Rupee terms is Rs. 50,000. If the Rupee appreciates to US 1 $ = 40 INR, then in rupee terms the earnings

of exporter will be Rs. 40,000. A fall in earnings despite the exports being constant. But the exporter who is based in India has to spend in INR in India; he has less money at his disposal constraining his further growth by way of limiting his investment capacity. THE INDIAN RUPEE (INR) has been appreciating rapidly, nearly 12% since January 2007 and touching 39.27 against USD (US dollar) earlier this month, its highest since March 1998. It is a well known fact that INR appreciation has affected almost all

sectors of the economy and dented our export growth. It has been proved beyond doubt that RBI has not been actively intervening in the forex market to check INR appreciation mainly on account of inflation worries. INR appreciation took an ugly turn around the last quarter, resulting in thousands of job cuts. Indias two top garment exporters cut between 5,000 and 6,000 jobs in the last quarter. The Tirupur garment industry workers are also facing the same threat - approximately 60,000 job cuts are

feared by the end of this financial year.

It is needless to say that almost all currencies of the emerging economies have appreciated against the USD since 2007. But, on this pretext, the Indian government cannot afford to sit idle even as the countrys exporters continue to bleed dry. Since July 2007, the government has announced fiscal packages to exporters battling the INR appreciation. It all started in July 2007 when the government announced an INR 1,400-crore package comprised of fiscal sops for exporters. For example, it provided relief from service tax to exporters. On Oct, 6 the government announced some more relief measures which included payment of

interest on EEFC (Exchange Earners Foreign Currency) account, cheaper pre-shipment and post-shipment credit.

According to the finance minister, the government is concerned with the rapid appreciation of INR and has responded swiftly by giving them (exporters), on different occasions, relief packages aggregating Rs 5,000 - Rs 6,000 crores.

But the biggest question here is whether these sops are adequate enough in the light of India eyeing an export target of USD160 billion and the INR appreciating by almost 12% since 2007. Many experts opine that these export sops are grossly inadequate considering the impact of INR appreciation. THE POSIVITE SIDE OF THE INR APPRECIATION AGAINST US DOLLAR.......

The rising Rupee doesn't mean bad news on all fronts. Appreciating Rupee brings a good news on Imports front and corporate borrowings front. Since India imports close of 70% of its Petroleum requirements, appreciating Rupee makes the oil imports cheaper, thereby putting less pressure on India's forex reserves. Another aspect where rising rupee brings benefits is in sense that Indian corporates can raise the money from foreign markets on much cheaper terms and it also makes it cheaper for them to buy assets abroad.

Controlling Appreciation of Rupee.... The RBI typically controls the appreciation by manipulating demand-supply dynamics of currency market. It purchases dollars (to create more demand for dollar) and sells rupees (to increase supply of INR, thereby decreasing its value). And precisely, there comes the dichotomy. As RBI sells more rupees, the money supply increases which means too much money chasing same (or less) number of goods, thereby leading

to inflation. So in effect one act of RBI creates another problem. Rising Inflation

Inflation generally means rise in prices.Inflation is an increase in the price of a basket of goods and services that is

representative of the economy as a whole.It is a persistence and substantial rise in general level of prices after full employment level of output. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. The money supply has to increase more than goods and services increase.

As mentioned above, the measures taken by RBI to control appreciating rupee contributes to rising inflation and same was assumed this time around when recently inflation crossed 12%

mark. There was criticism of RBI for not controlling appreciating rupee but the primary reason for not doing so was to control the inflation, under direction from Finance Ministry. However, the point to note here is that this time around the inflation was not primarily because of money supply dynamics alone. Supply constraints on part of many commodities (like pulses) and rising crude price (which has a trickle-down effect on transportation sector and many other commodities alongside) also played a major part in rising inflation this time around. IMPACT OF APPRECIATION OF INR AGAINST US DOLLAR ON STEEL INDUSTRY........ Appreciation of Indian Rupee has led to loss of comparative advantage for Indian exporters and also has put pressure on margins through cheaper imports, said Mr.Sunil Mittal, President CII, in a Press Release issued here today. The Indian Rupee has appreciated by 11.8% in the last one year and the currencies of competing countries in the international export markets had appreciated at a much lower rate and in some countries their respective currency has depreciated. Countries that are competitors to Indian exports in textiles, apparels and leather have a comparative advantage on the local currency front vis--vis US dollar as their respective currencies have appreciated at a lower rate than Indian Rupee. Chinese Yuan has appreciated by 3.6%, Pakistani Rupee has appreciated

by 0.3%, Bangladeshi Taka by 3.2% and the Sri Lankan Rupee has depreciated by 4.6% thus making Indian exports in this vital sector dearer since January 2007, said the CII President. Similarly, in the case of steel, countries that are competitors to Indian exports such as China, South Korea and Thailand have a comparative advantage when compared to India due to lower rates of appreciation of their respective currencies. South Korean Won had appreciated by 2.3% and Thailand by 10.4 % since January 2007. This is the case even in Auto components and

places Indian steel and auto components exports at a disadvantageous position in the international markets, said the CII President Mr Mittal expressed concern over declining rates of exports growth particularly in the last four months. Export during the month of August 2007 registered a growth of only 18.91% compared to a growth registered in August 2006 at 41.14% and exports growth during the period April-June 2007 at 18.11% compared to 32.4% growth during the same period last year. Exports could have grown at a higher rate given the robustness in output growth in the first quarter and high rates of growth in

world output, said CII President. Reducing the interest rates will not only help Indian industry including exporters to reducing their costs, but will also reduce the interest rate arbitrage opportunities and thus will help in moderating inflows of US Dollars. It is time that RBI and the Government take measures that will help arrest further appreciation of the Rupee and certain damage control measures could be taken to reduce the impact of the dual problem of rupee appreciation and high interest rates on the bottom lines of Indian

industry.

Impact on Currency

Inflation rates in India have risen about 8.50% amid concerns surrounding the devaluation of the rupee and the erosion of the purchasing power of savings. In spite of Governmental interventions, the rupee is in a free-fall, having slipped by over

20%, making it one of the most awful performing currencies globally. RBI made thirteen rate increases attempts to docile the inflation in last one year but hardly achieved any significant result. Inflation rate maintained upwards trend. This is now reflected through the currency depreciation. Inflation directly enhances prices and thereby affects the purchasing power of currency. Currency value and inflation have a direct co- relation and impact each other. The currency re-evaluation is also essential with the change in domestic prices affected by inflationary forces. Currency is considered to be overvalued if the

suitable adjustment is not made with the price index fluctuations.

Impact on Gold

India currency devaluation has also resulted in surge of import by over 200% of gold and silver. Statistics show that imports of gold and silver to India were $8.96 billion a growth of 222%. The Reserve Bank of India purchased 200 tons of gold from the International Monetary Fund in 2009. From the start of 2011, some 30 banks in India have been granted permission to import

gold and silver. Further gold purchases are expected in coming months, as the Reserve Bank has issued licenses to seven more banks to import gold and silver. Indian banks are therefore contributing to the massive increase in demand for gold and silver. Chinese banks are also catering to the increased demand of Chinese people for gold bullion for investment and savings purposes. In fact, most of the worlds central banks are now diversifying from major currencies such as the dollar and euro into gold. In addition to India and China, these countries include Russia, Sri Lanka, Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia. Financial experts believe the increased demand for gold and silver from India and wider Asia is sustainable and that it will keep the precious metal market thriving.

Impact on Stock Market

As a result of de- valuation, Indian stock markets will face new threats. The operators and participants were earlier concerned

about domestic inflation rate and the Reserve Bank of Indias economic policies. But the fall in the value of Indian currency has taken aback all concerned. The investors are bound to suffer as there is always a positive correlation between stock index and corporate results. Impact on Market Forecast The wide-ranging perception in the financial market is that until the global macroeconomic environment settles, the rupee will continue to be under pressure. "India's external position has become increasingly vulnerable to global risk appetite. Further weakness cannot be ruled out," Royal Bank of Scotland said in a research

note. The rupee is down 14.80% on the year, with the closest loser among other Asian units being the Thai baht, which has shed just 3.2%, followed by the Malaysian ringgit that is down 3%. The rupee's slither may continue due to the decline in foreign exchange inflows and swelling outflows. The Euro zone, the world's largest trading block and India's biggest trading partner, is also in a deep crisis. In times to come, this zone has to stabilize to bring some semblance of order to the global currency markets. Numbers of Indian scams have also distracted governments concentration away from economy. These scams make the bad image of India in the global market.

CONCLUSION:

It can be inferred that the issue of INR appreciation will play a major role if India has to become a superpower nation by 2020. We have seen that as the Indian stock market is booming in the past few months, the rupee is becoming stronger as compared to the US dollar. This implies as the abiding faith of foreign investors in robustness of the Indian economy and the inflows are rising at

exponential rates. But the exports are taking a hit because of this phenomenon. This is the dilemma which the policy makers have to address.

Though the strengthening of the rupee will benefit certain industries, others might face the brunt. But the gain will be to the entire Indian economy. The basic foundation for any country to become an economic superpower is to have a strong

infrastructure. This need for huge investments, are being met through FDIs & FIIs. Similar developments in other key areas would truly help India to reach the position of the 3rd largest economy of the world behind US and China by 2035.