the sinking rupee

The Sinking

ByNeha KalraSchool of Management StudiesAIMTC, JAl

A snapshot of the World Economy

• The United States of America experienced a major shake-out, technically known as recession in the year 2008.

• The financial crisis was linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States.

• The rise in the quantity of bad debt lead to a liquidity crunch.

• Significant decline in economic activity, 81 public corporations file for bankruptcy in the United States

• Resulted in the collapse of major financial institutions like Lehman Brothers, Merrill Lynch, Bank of America, etc.

Survival of the fittest: India

• It was indeed the survival of the fittest, the Indian economy emerged out as a real hero with only minor bruises.

• Despite an unprecedented global recession, India remained the second fastest growing economy in the world.

• No recession for India• India’s GDP grew by more than 6% throughout

this period• Further, India also made a successful recovery

from 2009-11.

THE PLIGHT OF THE THE PLIGHT OF THE INDIAN ECONOMY : INDIAN ECONOMY :

2011-122011-12

• Phase: Slowdown• Indicators: GDP-6.5% as against predicted 7.6%

Issue of major concern:

Depreciating Rupee

Depreciation or Devaluation??

Revaluation of Currency

Devaluation of Currency

Currency Apprec iation Currency Deprec iation

What is depreciation?• Currency depreciation refers to a fall in value of one currency

with respect to another.

• More and more rupees are sold and dollars are brought-

Rupee Depreciation

So, if 1-1-2012---1 Re. = 2 Sri Lankan rupees

1-6-2012---1 Re = 1.5 Sri Lankan rupees

INR would have depreciated by 25 per cent.

Again if, today 1$ = 45 Rs.

tomorrow 1$ = 60 Rs.

INR would have depreciated by 33 per cent.

Factors that pushed INR into the well !!

Eurozone Crisis

EURO to ZERO

• Birth of Euro-January 1, 1999.

• Member nations- 16 countries and 27 members

• EU comprised of strong (Germany, France) as well as weak (Greece, Portugal) economies.

• Culprits- PIIGS economies (Portugal, Italy, Ireland, Greece, and Spain.

Permissible LimitGermany- Agreed!

Each Country should not borrow more

than 60% of its GDP

Greece-It`s just a

norm, right?

Extent of the Crisis: Debt as a % of GDP

European Stability Mechanism- Mockery

Implications for India

• Dent in the India’s merchandise trade, since the EU has been one of India's important export destinations. India makes nearly 30% of its exports to Europe.• Default concerns of European nations has resulted in loss of confidence in the Euro and appreciation of dollar.

Strengthening of Dollar

Reasons:• Sovereign debt woes of EU• The dollar accounts for 40% of global trade.

The demand for US dollar comes from individuals and institutions that require American currency to enter into a transaction.

• Individuals travelling abroad carry foreign currency to transact abroad.

• Foreign Direct Investments (FDI)• Foreign Institutional Investors (FII)• Importers

Withdrawl Of Foreign

Investments

How Does Rupee Fall Affect Stock Markets ?????

Assume a Foreign Investor Having $10,000 Comes to

Invest in Indian Stock Markets!

Now He has to Convert his $ to Rs to invest in Indian

Stock Markets!


On 1-1-2011, 1$ = Rs.50

He Converts $10,000 to Rs.1$ = Rs.50Therefore,

10,000$ = Rs.5,00,000


He Decides to Buy Shares of L&T which was trading at

Rs.1,000/-

For Rs.5,00,000/- he can Buy 500 Shares of L&T.

(5,00,000/1000)


On 22-5-2012, Assume L&T is trading at Rs.1050/-

He is happy as his shares have gone up from

Rs.1,000/- to Rs.1,050/-


He Sells as his 500 Shares of L&T at Rs.1,050 and

gets 500 x 1050 = Rs.5,25,000/-

Now he Reconverts his Rs to $

On 22-5-2012, 1$ = Rs.55.39/-


He Converts Rs.5,25,000 to $.

1$ = Rs.55.39Therefore,

Rs.5,25,000 = $.9,478.24(5,25,000/55.39)

10,000$ Now worth only 9,478.24$


LOSS OF 521.76$


Imagine if Share prices

have also come down from

Rs.1,000/- To Rs.900/- ?????


Then 500 Shares x 900Rs/Share

= Rs.4,50,000/-

Reconvert Rs to $4,50,000/55.39

= $8,124.21

LOSS = $1,875.79Loss of 18.76%


Fire in the Mountain RUN RUN RUN

Yawning Trade Deficit

• Value of imports > Value of exports

EXPORTS 304

IMPORTS 489

IMPORTS 370

EXPORTS 251

IMPORTS 288

EXPORTS 179

DEFICIT 2011-2012 2010-2011 2009-2010 185 119 109

India’s major Imports

Oil Price Rupee Exchange Rate

Cost Price Per Barrel Oil

Manipulation?

• Because Indian Rupee is weak, government has to providesubsidy to Oil Companies – Total oil Subsidy Bill = Rs. 1,50,000 crore• This is money collected from honest taxpayers.

National Poverty-Imposing poverty on an already poor

country

An interesting fact

Persistent Inflation

• The RBI records the level of inflation in india Wholesale Price Index

• Consumer Price Index

Policy Paralysis

Key policy reforms like • Direct Tax Code (DTC) • Goods and Service Tax (GST) have been in the pipe line for years.

• A retrospective tax law (GAAR) has already earned a lot of flak from the business community.

• The government announced FDI in retail but had to hold back amidst huge furore from both opposition and allies.

This has further made investors sentiment negative over the Indian economy.

Measures taken by Govt.

REDUCTION IN FOREIGN EXCHANGE RESERVES Fall in Foreign Exchange Reserves

• External Commercial Borrowings limit has been lifted to $40 bn from $30 bn earlier.

• The limit on foreign institutional investment in government securities in India has been enhanced by $5 bn.

• The RBI has decided to widen the non-resident investor base in government securities with a limit of $20 bn.

BEARING THE BRUNT

• Costlier Imported items• Foreign travel• Education Abroad

WHO WILL BENEFIT ??• Remittances

• Foreign tourists

Is India the only loser??

Future of Indian Rupee. . . ???

THANK YOU!!

the sinking rupee

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