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INTRODUCTION
Rupee is the name given to the official currency that is used in several countries including India,
Bhutan, Pakistan, Sri Lanka, Nepal, Mauritius, Maldives and Indonesia. The name rupee comes
from the Sanskrit language word rupyakam meaning silver coin. Rupee in different regions is
denoted with different symbols most commonly Rs, and Rp. One unit of the currency is
equivalent to one hundred equal paise.
Among all the countries mentioned above that have rupee as their national currency; the Indian
rupee is the most important with respect to value, preference and popularity. India stands among
those countries that discovered the need for a currency and the first rupee coins were issued as
early as in the 16th century. The currency code and numeric code for Indian rupee according to
the ISO 4217 standard are INR and 356 respectively. The currency in India is denoted with the
sign Rs. India retains the reputation of issuing the some of the earliest coins in the history of
mankind. The currency of India i.e. the Indian rupee is also one of the well-established
currencies in the world. The importance of the Indian rupee in the world market is characterized
by the fact that Bhutan and Nepal peg their currencies to the Indian rupee. Moreover, the Indian
rupee is considered a legal tender in Bhutan that has dollorized the currency. Indian rupee does
not use the western number system and has a number system of its own. As in the western
number system, the large values of money are counted in terms of hundred, thousand, million
and billion respectively, in the Indian number system the large values are counted as hundred,
thousand, lakh and crore. The Indian number system is also popular among the countries like
Pakistan, Nepal, Myanmar, Bhutan and Bangladesh. Earlier the rupee coins were made up of
silver and that is where this name rupee is derived from as the word rupyakam means silver
coin in the Sanskrit language. But when the large silver mines were discovered in the United
States of America and parts of European continent, the value of silver declined drastically as
compared to gold on which all the other strong economies were based. As a result, the value of
Indian rupee also declined as compared to other currencies in the world and this incident is called
the fall of rupee.Indian rupee did not use the decimal system and rather was subdivided into 16
annas till 1957. In 1957, the decimal monetary system was adopted and one unit of rupee was
restructured equivalent to 100 equal paise. The currency in the country is issued in the form of
banknotes and coinage, the Reserve Bank of India and the Government of India possessing the
issuing authority for banknotes and coins respectively. The central bank i.e. the reserve bank of
India is entitled to change the banknote series and the Mahatma Gandhi series, which is in
circulation currently, was launched in 1996. The notes are issued in 7 denominations i.e. Rs 5, Rs
10, Rs 20, Rs 50, Rs 100, Rs 500, Rs 1000. Two more denominations for banknotes i.e. Rs 1 and
Rs 2 are still in circulation but no new notes are being printed as coins for both these
denominations are being minted now. Each note depicts the face value of the note in 17
languages. The notes also have some unique features quite often called the security features that
help in avoiding the duplicity and illegal circulation of the notes. These features include
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Mahatma Gandhi watermark
Silver security
Latent image
Micro-lettering
Fluorescence
Optically variable ink
Back to back registration
Coins for the Indian currency are minted in 7 denominations namely 10 paisa, 20 paisa, 25 paisa,
50 paisa, Rs 1, Rs 2 and Rs 5 under the Coinage act 1906. The country has four coin mints one
each at Mumbai (Maharashtra), Hyderabad (Andhra Pradesh), Kolkata (West Bengal), Noida
(Uttar Pradesh). Like in the case of banknotes, the management of circulation of coins is in the
hands of the Reserve Bank of India.















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HISTORY

The history of the rupees traces back to Ancient India in circa 6th century BC, ancient India was
one of the earliest issuers of coins in the world, along with the Chinese wen and Lydian staters.
The word rpiya is alleged to be derived from a Dravidian word rpa, which means "wrought
silver, a coin of silver", in origin an adjective meaning "shapely", with a more specific meaning
of "stamped, impressed", whence "coin". It is derived from the noun rpa "shape, likeness,
image". The word rpa is being further identified as having sprung from
the DravidianHowever, an Indo-Aryan origin is more likely compare Sanskrit rp, n. m. A
form, beauty (Rig-Veda), rpaka adjective and n. m. A particular coin Pacatantra,
rpya,*rpiya-, adj. Beautiful, bearing a stamp Pini., n. Silver Mahabharata. There is no
evidence of transmission to Indo-Aryan from Dravidian and textual evidence dates to well before
any references in the later Dravidian.
Arthashastra, written by Chanakya, prime minister to the first Maurya emperor Chandragupta
Maurya (c. 340-290 BCE), mentions silver coins as rupyarupa, and other types of coins
including gold coins (Suvarnarupa), copper coins (Tamararupa) and lead coins (Sisarupa) are
also mentioned. Rupa means form or shape, example, Rupyarupa, Rupya - wrought silver, rupa -
form.
Sher Shah Suri, during his five year rule from 1540 to 1545, set up a new civic and military
administration and issued a coin of silver, weighing 178 grains, which was termed
the Rupiya. The silver coin remained in use during the Mughal period, Maratha era as well as
in British India. Among the earliest issues of paper rupees include; the Bank of
Hindustan (17701832), the General Bank of Bengal and Bihar (177375, established
by Warren Hastings), and the Bengal Bank (178491).
The Indian rupee was a silver based currency during much of the 19th century; which had severe
consequences on the standard value of the currency, as stronger economies at that time were on
the gold standard. During British rule, and the first decade of independence, the rupee was
subdivided into 16 annas. Each anna was subdivided into either 4 paisas, or 12 pies. So One
rupee was equal to 16 Annas, 64 Paises of 192 Pies. In 1957, decimalisation occurred and the
rupee was divided into 100 Naye Paise (Hindi/Urdu for new paisas). After a few years, the initial
"Naye" was dropped.
For many years in the early and mid-20th century, the Indian rupee was the official currency in
several areas that were controlled by the British and governed from India; areas such as East
Africa, Southern Arabia and the Persian Gulf.
Ancient India in circa 6th century BC was one of the earliest issuers of coins in the world, along
with the Chinese wen and Lydian staters. The first "rupee" is believed to have been introduced
by Sher Shah Suri (14861545), based on a ratio of 40 copper pieces (paisa) per rupee.
The word rpiya is derived form word rpa, which means "wrought silver, a coin of silver",
[
in
origin an adjective meaning "shapely", with a more specific meaning of "stamped, impressed",
whence "coin". It is derived from the noun rpa "shape, likeness, image".
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Arthashastra, written by Chanakya, prime minister to the first Maurya emperor Chandragupta
Maurya (c. 340-290 BCE), mentions silver coins asrpyarpa, other types of coins including
gold coins (Suvarnarpa), copper coins (Tamrarpa) and lead coins (Sisarpa) are also
mentioned. Rupa means form or shape, example, Rpyarpa, Rpya - wrought silver, rpa -
form.
During his five year rule from 1540 to 1546, he set up a new civic and military
administration; Sher Shah Suri issued a coin of silver, weighing 178grains, which was termed
the Rupiya. The silver coin remained in use during the Mughal period, Maratha era as well as
in British India.
The Indian rupee, which was at par with the American currency at the time of independence in
1947, hit a record low of 61.80 against the dollar recently. This means the Indian currency has
depreciated by almost 62 times against the greenback in the past 66 years.

The currency has witnessed a large volatility in the past few years. This volatility became acute
in the past three months affecting major macro-economic data, including growth, inflation, trade
and investment.

Managing volatility in the currency markets has become a big challenge for the economic policy
makers in the country. The central bank as well as the government has taken a series of measures
to curb the volatility in the markets.
Despite those measures, the rupee continues to depreciate. And the trend is unlikely to reverse
any time soon.

The Indian currency has witnessed a roller-coaster journey since independence. Many
geopolitical and economic developments have affected its movement in the last 66 years. Here is
a broader look at the Indian rupee's journey since 1947:

- India got freedom from British rule on Aug 15, 1947. At that time the Indian rupee was linked
to the British pound and its value was at par with the American dollar. There was no foreign
borrowings on India's balance sheet.

- To finance welfare and development activities, especially with the introduction of the Five-
Year Plan in 1951, the government started external borrowings. This required the devaluation of
the rupee.

- After independence, Indian chooses to adopt a fixed rate currency regime. The rupee was
pegged at 4.79 against a dollar between 1948 and 1966.

- Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965, resulted
in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57
against the dollar.
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- The rupee's link with the British currency was broken in 1971 and it was linked directly to the
US dollar.
- In 1975, the Indian rupee was linked to a basket of three currencies comprising the US dollar,
the Japanese yen and the German mark. The value of the Indian rupee was pegged at 8.39 against
a dollar.
- In 1985 it was further devalued to 12 against a dollar.

- India faced a serious balance of payment crisis in 1991 and was forced to sharply devalue its
currency. The country was in the grip of high inflation, low growth and the foreign reserves were
not even worth to meet three weeks of imports. Under these situations, the currency was
devalued to 17.90 against a dollar.

- The year 1993 is very important in Indian currency history. It was in this year when the
currency was let free to flow with the market sentiments. The exchange rate was freed to be
determined by the market, with provisions of intervention by the central bank under the situation
of extreme volatility. In 1993, one was required to pay Rs.31.37 to get a dollar.
- The rupee traded in the range of 40-50 between 2000-2010. It was mostly at around 45 against
a dollar. It touched a high of 39 in 2007. The Indian currency has gradually depreciated since the
global 2008 economic crisis.
- Former finance minister Manmohan Singh, who is now the prime minister, was instrumental in
liberalising the currency regime. The move led to a sharp jump in foreign investment inflows and
boosted the economic growth.

Pre-Liberalization period (1947-1991)
Year 1947: Indian rupee was linked to the British pound and its value was at par with the
American dollar. There was no foreign borrowing on India's balance sheet.

Year 1951: Introduction of the Five-Year Plan. The government started external
borrowings. This required the devaluation of the rupee

Year 1947-1973: Indian chooses to adopt a fixed rate currency regime. The rupee was
pegged at 4.76 against a dollar between 1948 and 1966.

Year 1966: Indian governments have to devalue the currency to 7.50 against the dollar.
Reason: Two consecutive war China in 1962, Pakistan in 1965

Year 1975 : The rupee's link with the British currency was broken. It was linked to a
basket of three currencies comprising the US dollar, the Japanese yen and the German
mark. The value of the Indian rupee was pegged at 8.39 against a dollar.

Year 1985: It was further devalued to 12 against a dollar

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Post Liberalization Period (Since 1991)

Year 1991: India faced a serious balance of payment crisis. It was forced to sharply
devalue its currency. The country was in the grip of high inflation, low growth and the
foreign reserves were not even worth to meet three weeks of imports. The currency was
devalued to 17.90 against a dollar.

Year 1993: Introduction of Unified Exchange Rate System. The currency was let free to
flow with the market sentiments. One was required to pay Rs.31.37 to get a dollar.

Year 2000-2010: The rupee traded in the range of 40-50. It touched a high of 39 in
2007.The Indian currency has gradually depreciated since the global 2008 economic
crisis.

Year 2011-2012: Former finance minister Manmohan Singh, who is now the prime
minister, was instrumental in liberalising the currency regime. The move led to a sharp
jump in foreign investment inflows and boosted the economic growth.

Year 2013 : The Indian currency was around 54 mark in the beginning of the year. Its
fall in June after sliding 8 per cent in May. Indian rupee touching a record low of 60
against the dollar on Wednesday (June 26). The Indian debt market has seen an exodus
of $3.3billion foreign capital since 21 May 2013. Continuing its free fall, the rupee on
Monday breached63-mark a dollar to end at record low of 63.13,recording the decade's
worst single-day fall of 148 paise














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Changing Phase
Money is not an organic creature but its value keeps changing with the society and its economic
conditions. One rupee in 1947 is not the same as one rupee today, both in terms of appearance
and purchasing power.
The value of a country's currency is linked with its economic conditions and policies. "The
value of a currency depends on factors that affect the economy such as imports and exports,
inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets,
foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking
capital, commodity prices and geopolitical conditions," says Pramit Brahmbhatt, chief executive
officer, Alpari Financial Services (India), a foreign exchange brokerage.
Income levels influence currencies through consumer spending. When incomes increase, people
spend more. Higher demand for imported goods increases demand for foreign currencies and,
thus, weakens the local currency.
Balance of payments, which comprises trade balance (net inflow/outflow of money) and flow of
capital, also affects the value of a country's currency.

"A country that sells more goods and services in overseas markets than it buys from them has a
trade surplus. This means more foreign currency comes into the country than what is paid for
imports. This strengthens the local currency," says Kishore Narne, head, commodity and
currency research, Anand Rathi Commodities, a brokerage house.

Another factor is the difference in interest rates between countries. Let us consider the recent
RBI move to deregulate interest rates on savings deposits and fixed deposits held by non-resident
Indians (NRIs). The move was part of a series of steps to stem the fall in the rupee. By allowing
banks to increase rates on NRI rupee accounts and bring them on a par with domestic term
deposit rates, the RBI expects fund inflows from NRIs, triggering a rise in demand for rupees
and an increase in the value of the local currency.

The RBI manages the value of the rupee with several tools, which involve controlling its supply
in the market and, thus, making it cheap or expensive.

"Some ways through which the RBI controls the movement of the rupee are changes in interest
rates, relaxation or tightening of rules for fund flows, tweaking the cash reserve ratio (the
proportion of money banks have to keep with the central bank) and selling or buying dollars in
the open market," says Brahmbhatt of Alpari.

The RBI also fixes the statutory liquidity ratio, that is, the proportion of money banks have to
invest in government bonds, and the repo rate, at which it lends to banks.

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While an increase in interest rates makes a currency expensive, changes in cash reserve and
statutory liquidity ratios increase or decrease the quantity of money available, impacting its
value.

Inflationary pressure

Every generation complains about price rise. Prices shoot up when goods and services are scarce
or money is in excess supply. If prices increase, it means the value of the currency has eroded
and its purchasing power has fallen.

Let us say the central bank of a country increases money flow in the economy by 4 per cent
while economic growth is 3 per cent. The difference causes inflation. If the growth in money
supply is 10 per cent, inflation will surge because of the mismatch between economic growth and
money supply. In such a scenario, loan repayments will be a lesser burden if interest rates are
fixed, as you will pay the same amount but with a lower valuation.

A fall in purchasing power due to inflation reduces consumption, hurting industries. Imports also
become costlier. Exporters, of course, earn more in terms of local currency.

However, if the increase in money supply lags economic growth, the economy will face
deflation, or negative inflation. The purchasing power of money will increase when the economy
enters the deflationary state. If you think deflation will help you consume more and enjoy life
more, you are wrong.

Unless the fall in prices of goods is because of improved production efficiencies, you will have
less money to spend. If you have a fixed-interest loan to repay, your debt will have a higher
valuation. Yields from fixed-income investments made before deflation set in will, of course,
increase in value.

Minting money

A fantasy world where trees have banknotes and bear coins instead of fruits might sound like a
dream come true. Economists will be the devil's messenger in that world when they break the
news that your money is as good as dry leaves.

If you are looking for a machine that can print money, just meet someone who actually owns
one-the government. Money is printed by governments, but they cannot print all the money they
need. When a government prints money to meet its needs without the economy growing at the
same pace, the result can be catastrophic. Zimbabwe is a recent example. After the 1990s land
reforms in free Zimbabwe, farm production as well as manufacturing declined drastically.
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However, the government continued to print money for its expenses. Zimbabweans started losing
faith in the local currency. As inflation surged drastically, the Zimbabwean dollars were printed
in denominations as high as 100 trillion. After the currency lost its value, people started using US
dollars. In April 2009, the country put its currency on hold and switched to US dollars.

In the past, governments used to back their currencies with gold reserves or a foreign currency
such as the US dollar that could be converted into gold on demand. The gold standard currency
system was abandoned as there was not enough gold to issue money and currency valuations
fluctuated with the supply and demand of gold.

In the modern economy, governments print money based on their assessment of future economic
growth and demand. The purchasing power of the currency remains constant if the increase in
money supply is equal to the rise in gross domestic product and other factors influencing the
currency remain unchanged.

Forex Demand

Though international trade and movement of people is increasing rapidly, there is no currency
that is acceptable across the globe. Whether you go for higher studies to the US or fly to Rio for
a vacation, you have to pay for services and goods in the currency that is accepted in the country.
Even while shopping online on stores run by foreign companies, you have to pay in foreign
exchange.

The foreign exchange rate for conversion of currencies depends on the market scenario and the
exchange rate being followed by the countries. Floating exchange rates, or flexible exchange
rates, are determined by market forces without active intervention of central governments. For
instance, due to heavy imports, the supply of the rupee may go up and its value fall. In contrast,
when exports increase and dollar inflows are high, the rupee strengthens.

Earlier, most countries had fixed exchange rates. This system has been abandoned by most
countries due to risk of devaluation of currencies owing to active government intervention. Most
countries now adopt a mixed system of exchange rates where central banks intervene in the
market to buy or sell the different currencies to control the movement of their own currencies.

Not everyone loses in a weak currency scenario. Exporters across the 17-country euro zone, for
instance, are benefiting from a weak local currency. Sometimes countries use various ways to
keep their currencies undervalued to promote exports. Chinese Renminbi is one such currency
that several economists say is undervalued.

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Behind The Fall

Now that we know the factors that determine the value of a currency, how does the rupee in your
bank account and purse stand at present? Over the past few months, since August, the rupee has
been weakening against the dollar.

"The recent fall in the rupee was mainly due to conditions in the euro zone, plunging stock
markets, falling foreign investment inflows and strengthening of the dollar," says Brahmbhatt of
Alpari.

"Rising fiscal deficit and untameable inflation were behind the fall in the rupee. As India runs a
large current account deficit, it needs a constant inflow of dollars, which was not there. High oil
prices inflated the import bill and resulted in further widening of the current account deficit,
which accelerated the rupee fall," says Narne of Anand Rathi.

"The decision by the government to allow foreign investors to directly invest in Indian equity
could bring some capital flows and have a positive impact on the economy and the rupee," adds
Narne.

The rupee has recovered somewhat in January, but the danger still looms. If you need some
foreign currency in the future such as for the tuition fee of your daughter studying in the US or a
summer vacation in Ireland, plan right now and hedge your risk with the help of currency
futures. Consider the basics of currency movements and their likely impact before taking your
next investment decision.










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Reasons for fall in the value of Rupee
The rupee has plunged to an all-time low against the dollar and its fall has become a subject for
debate. The usual discussions on the fall of the rupee bring up macro economics matters such as
slow economic growth, huge current account deficit, rising imports etc.
At the time of independence when India had no foreign borrowings the rupee was at par with the
dollar. With the introduction of the 5 years plan and the subsequent requirements for foreign
investments the dollar slowly rose. In 1985, after the Bofors scam, which toppled Rajiv Gandhis
government, the dollar was equal to 12.35 rupees and since the economic liberalization in 1991,
there was a sharp devaluation of rupee and the rupee had dropped to Rs.24.5 against a Dollar.
The dawn of the third millennium gave a further worsened the condition rupee against dollar and
the rupee has hit an all time low of Rs. 65.42 against a dollar on the 22nd of August 2013. Indian
economists are trying hard to chalk out a strategy to counterbalance the falling value of rupee but
it seems the attempts are futile.
There major reasons for the plunging fate of the rupee are:
Current Account Deficit (CAD)
CAD is considered to be the key factor behind the steep volatility of rupee against dollar. CAD
occurs when the total import of goods and services of a country is greater than the total export
goods and services thus making India a debtor to the rest of the world. Indias current account
averaged a deficit worth 1.5 billion USD since 1947 until 2013. In the first quarter of 2013 the
CAD was 18.1 billion and at present it has gone up over 20 billion. This has hit hard on the
rupee.
Strengthening of Dollar In the last six months the dollar has strengthened by 3.52 percent with
the strengthening of the US economy. The dollar has been rising on signs of growing economic
momentum and talk of an early end to the Feds stimulus effort. This is something which is
beyond the control of the Indian Government and it is hampering the recovery of the rupee.
Insufficient inflow of FDIs and outflow of the foreign investments The downfall in the Indian
economy has worsened the situation and the government is unable to generate heavy capital
inflows. Despite all the government effort to allow Foreign Direct Investment (FDI), there hasnt
been significant FDI inflow. The US federation has withdrawn some of its bond buying
programmes resulting in a sudden outflow of money that in return has left India far behind in the
race .Foreign investors has been pulling out of the Indian economy. The month of May has seen
a record outflow of foreign investments of Rs. 44162 crore. With the giants like Posco pulling
out of its Rs. 30000 crore steel plant project in Karnataka followed by ArcelorMittal pulling out
of its Rs. 50,000 crore project in Odisha due to delays and land acquisition delays. This has
shrunk the total inflow of capital in India. Indian investors have been spending more abroad than
foreign investors have been spending in India. This has led to the further deficit of current
account.
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Rising Imports
The rising import bill is one of major concern and is has hindered the government effort to tackle
the falling rupee. Oil accounts for 35% of the total imports and gold 11% on Indias current bill.
There has been a heavy demand for the greenback from the exporters of oil, the most prolific
buyers of dollar in the world market, thus pushing rupee lower. In the gulf countries, the dealing
of oil is done in dollars, i.e, if India has to purchase oil, it has to pay in dollars, so for this India
needs purchase dollars from USA in exchange of gold. This has led to the further devaluation of
the rupee. Also, the sliding prices of gold have triggered the government to lower the imports of
gold, thereby increasing the Current Account Deficit (CAD) and concurrently weighing heavy on
the currency.
Poor Economic Growth
The Gross Domestic Product (GDP) has hit its lowest patch in the last 10 years. With fall of the
GDP to 4.8%, it had significant effect on the stock markets and the falling rupee. The
manufacturing, mining and the agricultural sector has faltered and investors have become
cautious of investing in India.
The central government has unravelled a multipronged strategy to bring about an increment in
the inflow of dollars and limit the outflow to compensate for the sliding value of rupee. A
planned increase in import duty has been exercised to shore up the decrement in rupee. Some of
the other possible remedies that can be emphasized are:
The customs duty on several red-hot imports like gold and silver is on the rise as its a
strategic movement by the central government to ease the gap between dollar and rupee.
NRI bank deposits can be made more attractive and foreign loan norms eased.
The government has also decided on three public sector institutions based on finances to
raise funds in dollars through bonds.
Electronic goods top the list when it comes to making big business. In order to stabilize
rupee a significant increase in customs duty on Electronic goods needs to be exercised.
Another point that can be kept on the anvil is that some imports should be denied. The
products can include crude palm oil, copper and certain varieties of coal.
Economists believe that these measures will bridge the foreign exchange (forex) gap by $1.8
billion. Even finance minister P.Chidambaram anticipates that the government will be able to
prune annual imports by $7 billion and thereby increasing inflows by $11billion. This would in
return help maintain the Current Account Deficit (CAD) at $70 billion which roughly estimates
to 3.7 % of the gross domestic product. This calculated statistic with these measures is lower
than that of last year that had estimated to $4.8 billion.
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There have been a slew of measures that have been undertaken by the government but to no
avail. It clearly shows its urgency to deflect a possible crisis on the left over payments. Way back
in 2001, as an aftermath of the 9/11 attacks and Dotcom bust, State Bank of India (SBI) managed
to mint $5 billion through Indian Millennium Deposits. This time State Bank of India refuses to
play a role in decrementing dollar debt. A quasi-sovereign has been signed by the government
and other financial institutions like Power Finance Corporation and Indian Infrastructure Finance
Corporation Ltd.
Taking a closer look at these issues, the fall in rupee can be attributed primarily to 3 broad
factors.
Firstly, the grim global economic outlook, essentially due to the European debt crisis.
Due to turbulence in European markets, investors are considering dollars as a safe haven
for their investments in the longer run. This led to an increased demand for dollars vis--
vis the supply for rupee and thus the depreciation. Another line of thought could be that
while investors are shifting from European markets, why are they not investing in the
Indian markets? The Indian economic scenario for the entire 2011 has been plagued by
high rate of inflation, hovering above 8%, and extremely low growth in manufacturing
sector. The HSBC-PMI (Purchasing Managers index) fell to 51 in the month of
December 2011. The cumulative effect of these factors is leading to a shift in investor
sentiments towards dollar market.
Secondly, the fall in rupee can be largely attributed to the speculations prevailing in the
markets. Due to a sharp increase in the dollar rates, importers suddenly started gasping
for dollars in order to hedge their position, which led to an increased demand for dollars.
On the other hand exporters kept on holding their dollar reserves, speculating that the
rupee will fall further in future. This interplay between the two forces further fuelled the
demand for dollars while sequestering its supply from the market. This further led to the
fall in rupee.
Lastly, there has been shift of FIIs (Foreign institutional investors) from the Indian
markets during the current financial year 2011. FIIs leads to a high inflow of dollars into
the Indian market. As per a recent report, the share of Indias FII in the developing
markets has decreased considerably from 19.2 % in 2010 to 3.8% in the year 2011. As
FIIs are taking their investments out of the Indian markets, it has led to an increased
demand for dollars, further leading to a spiraling rupee.
Encompassing all these factors, there is a lack of firm initiative by government on issues
such as allowing FDI in retail. Recent debacles such as 2G have further rendered the Indian
market unattractive to a certain extent.

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Effects Of Falling rupee

The first major impact of the falling rupee can be seen on the 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. As is clear from Fig.1 although the price of oil has
gone down from $118 per barrel to $109 per barrel, not much benefit can be derived since
exchange rate too shoot up from Rs. 44 to Rs. 52.7 a dollar.. Instead, the price of importing oil
increased to an extend of RS 489 (as is clear from Fig2 (b)). This has severely impacted the
bottom line of these companies as well as the subsidy bill of the Indian government. Huge
buying of dollars from the market in order to meet the import bill has further added to the
existing woes. Additionally, the falling rupee has added further to the inflationary pressures, as
imports have become costlier and thus increasing the prices of key commodities such as oil,
imported coal, minerals, and metals. However the falling rupee has substantially appreciated the
revenues for the exporters, who receive more rupees for their dollar receipts. These industries
include the IT Services industry, textiles and other export oriented industries. Increasing
imbalance in trade i.e. increasing imports over exports is bound to have severe impact on
countrys fiscal deficit, which is pegged to increase by .8 percentages to 5.4% of GDP from the
originally estimated value of 4.6% of GDP.
Some other effects are as follows :
Trade deficit will widen because of costlier imports, worsening the current
account deficit.
Fuel price will keep petroleum subsidy in check, but fertilizer subsidy will rise.
Spending on any kind of foreign exchange denominated spending will increase.
Capital inflow will slow or reverse.
Spending on discretionary goods will increase.
Forex reserves could fall putting pressure on rupee.
In case of weak demand companies may not be able to pass on higher inputs
costs.
The government and the RBI have issued a series of measures in recent days
designed to reduce the current account deficit and bolster the rupee, including
increases in the import duty on gold, the end of duty exemptions for flat screen
televisions brought in by airline passengers and restrictions on outward direct
investment by Indian companies and individuals.
Exports are unable to leverage the weak rupee fast enough given the speed of its
descent. In fact many exporters are caught out because of fixed price contracts
in rupees wherein they cannot get the benefits of its rapid fall. The balance of
payments is tilting sharply against us.
The Indian stock- market will take a hiding as opposed to a beating.
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Global rating agencies will revise our rating downwards to Junk status, making
international borrowing difficult and even more expensive.
If the automated devaluation brought on by the rupee makes some asset classes
attractive, there may be slight recovery because of arbitrage opportunities and
bottom-fishing.

The Finance Ministry has argued that this sharp decline in the rupee is no reason to panic. Its
representatives have suggested that this is happening because most currencies have depreciated
relative to the U.S. dollar ever since Ben Bernanke, the head of the United States Federal
Reserve, indicated a possible decline in the monetary policy of quantitative easing that had
encouraged capital to move away from the U.S. in search of higher returns in other currency
assets. But this is simply not true. First of all, the rupee had declined even when the U.S.
monetary policy was at its most lax and when countries such as Brazil had complained about the
currency wars generated by the U.S. quantitative easing.
Further, recent trends indicate a significant worsening of both trade and current accounts. Both
exports and imports actually declined in 2012-13 compared with the previous year, but even so
the trade deficit still increased by nearly 4 per cent, or more than $7 billion. In April 2013,
exports were 2 per cent higher than in April 2012but imports were 11 per cent higher and non-
oil imports were 15 per cent more. So the trade deficit increased by more than 26 per cent in
April 2013 compared with the previous year (Finance Ministry, Monthly Economic Report for
April 2013).
There are several ways in which the falling rupee immediately has an inflationary impact, one of
the most important of which is the price of energy. Since the misguided decontrol of oil prices, it
is not only the globally traded price of fuel but also the exchange rate that determines domestic
oil prices.
What is more, the increasing costs of imports can also affect exports, thereby wiping out any
global cost advantage accruing from the devaluation. For example, important export sectors such
as gems and jewellery, automobiles, machinery and chemicals are all very import-dependent, and
their rising costs could nullify the impact of the devaluation on their ability to sell more cheaply
in export markets. This is made worse by the fact that in the current depressed global trade
context, buyers are able to renegotiate contracts once the exchange rate has changed. Indeed,
many global buyers even in sectors such as garments and leather goods now insist on contracts
and invoicing in rupee terms.
This allows them to benefit completely from rupee depreciation, while the local producers are
forced to bear the rising domestic costs. This means that the falling rupee need not generate any
significant increase in exports as may be hoped.

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Effect on the Common man
Whether the currency would find its stable level or will continue to slide further remains a tricky
question. But till the currency settles itself, lets have a look at how continuous depreciation of
the Indian currency will affect the common man.

Importers/Exporters

Importers will strongly feel the pinch of falling rupee as they will be forced to pay more rupees
on importing products. Conversely, a feeble rupee will bring delight to the exporters as goods
exported abroad will fetch dollars which in return will translate into more rupees. Also, a weak
rupee will make Indian produce more competitive in global markets which will be fruitful for
India's exports.

Imported goods:
Buying imported stuff will become a very costly affair. You will have to shell out extra on
imported goods. For instance if you bought a product valued USD 1, you paid around Rs 54
(months ago) but you will now have to shell out close to Rs 68 for the same product.

Fuel price:
A weak rupee will increase the burden of Oil Marketing Companies (OMCs) and this will surely
be passed on to the consumers as the companies are allowed to do so following deregulation of
petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a
substantial increase in overall cost of transportation which will stoke up inflation.

RBIs monetary policy:
If the depreciation in rupee continues, it will further increase inflation. In such a situation RBI
will have very less room to cut policy rates. No cut in policy rate will add to the borrowers woes
who are eagerly waiting to get rid of the high loan regime.
Tourism:
The depreciating rupee will surely be a dampener if you are planning your holiday abroad. Your
travel charges as well as hotel charges will escalate drastically, let alone shopping and other
miscellaneous spending activity.



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Overseas Indians:
Money saved is money earned. Depreciation of rupee is certainly a good news for the overseas
Indians. Those working abroad can gain more on remitting money to their homeland.

Countrys fiscal health:
A frail rupee will add fuel to the rising import bill of the country and thereby increasing its
current account deficit (CAD). A widening CAD is bound to pose a threat to the growth of
overall economy.
Jobs And Remuneration:
Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which
is dependent on imports will have to face an increase in cost of production and operations.
"In order to nullify the increase, these companies will have to rationalise costs within their
control. One of this will be human resources. So, either lesser number of people will be hired or
the salary bill will be kept constant or reduced," says Rituparna Chakraborty, co-founder and
senior vice president, Team Lease Services. However, it is a good time for industries which earn
in dollars. "The information technology sector stands to gain, but global recessionary conditions
Buying a car:
The depreciation of rupee has impacted the automobile sector in three ways. First, input costs
have risen as these companies use imported components. Second, some companies will have to
pay higher royalty to foreign parent firms. Third, many have foreign currency loans in the form
of external commercial borrowings and foreign currency convertible bonds.

Therefore, more or less all auto companies will have to increase prices. "We expect at least a
further 2% increase in prices. Maruti has already revised prices twice in last two months. Others
like Hyundai, Honda and Ford that have large import content in their cars will have to soon
increase prices to protect margins," says Deepak Jain, assistant VP and research analyst, Share
khan Institutional Research.

Entertainment:
The imported paperback, your favourite pizza and the latest laptop will also become more
expensive. "There is an increase in the cost of imported books as well as the cost of sourcing
them. In most cases we are trying to absorb the increased cost, but there may be scenarios where
the end-user will get impacted," says Ankit Nagori, VP, categories, Flipkart.com.
Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported
components will also become costlier. International food chains which run outlets in India are
not denying the impact on profitability.
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"The depreciating rupee has had a significant impact on our capital expenditure as we import a
lot of special kitchen equipment. There has been an indirect impact too as a small part of inputs
are imported by our suppliers. If the trend continues, we will be forced to pass on some burden to
customers," says Vikram Bakshi, managing director and JV Partner, McDonald's India (North &
East).may set off the impact," says Chakraborty.

Foreign education:

For Abin Biswas (21), a B.Tech in biotechnology, an opportunity to work as a trainee intern in a
Harvard-MIT joint venture project was a dream come true and a proud moment for his parents.
The cost was high but Dr Anup Biswas, Abin's father, decided to bear the expenses.

"The institute is providing him just a daily travel allowance. So, nearly all expenses have to be
borne by us. Though the amount was huge for us, we agreed to send him as the platform he was
getting was big as well," says Rinijhini Biswas, Abin's mother.

With the rupee weakening, the burden has increased. The rent ($378) of a room he shares with
friends was Rs 17,000 (at Rs 45/$) in mid-August 2011 when he went. Now, it is Rs 19,500 (Rs
51.52/$). A meal ($6) which cost him Rs 270 then now costs Rs 300. This means an additional
food expense of Rs 1,800 per month.

"Abin's monthly budget, roughly $1,000, has risen from Rs 45,000 to Rs 53,000, the last
installment we paid. It will be difficult for us to bear his expenses if the trend continues," says
Rinijhini Biswas.

Students who have taken loans to fund their foreign degree are also bearing the brunt. Education
loans are usually in rupees, but as students pay their expenses in a foreign currency, the cost of
education and stay has increased. For $100,000, a student had to pay Rs 45 lakh. Now, he has to
shell out Rs 52-54 lakh, depending upon the exchange rate.

"The cost is in a foreign currency while the borrowing is in rupees. So, the students may fall
short of funds as the loan would have been taken according to the initial requirements. In such a
scenario, either the student's personal contribution will have to increase or he will have to ask the
bank to increase the loan amount," says Ashutosh Khajuria, president, treasury, Federal Bank.



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Measures to stabilize rupee
Government has taken a number of steps to stem the depreciation of Indian rupee including
moderation in demand of non-essential imports and enhancing supply of capital flows, Finance
Minister P Chidambaram said.
"A number of steps have been taken to moderate demand of non-essential imports on April 12,
2013, enhance capital flows to augment supply of foreign exchange and curb speculation in the
foreign exchange market to stem the rupee depreciation," Chidambaram said in a written reply to
Lok Sabha on Tuesday.
He said fall in value of rupee in the recent period is due to supply-demand imbalance in domestic
foreign exchange market on account of elevated levels of current account deficit (CAD) and
volatility in capital flows, particularly FII inflows.
Indian rupee breached the 64-mark against dollar intra-day by falling 98 paise to trade at record
low of 64.11 on Tuesday on the back of strong dollar demand.
Chidambaram said the impact of rupee depreciation on domestic consumers is mitigated to a
large extent on the back of substantial subsidy outgo on imported items such as diesel, LPG,
kerosene, fertiliser.
Also, headline inflation based on wholesale price index (WPI) has been at moderate levels in
recent months at 4.86 per cent in June, he added.
In reply to a question on economy, he said several steps have been taken to revive economic
growth including speeding up of infrastructure projects, enhancement of credit to infrastructure
companies and strengthening of financial and banking sectors.
Besides, liberalized FDI norms in several sectors including telecom, deregulation of sugar sector,
launch of inflation indexed bonds, fiscal consolidation through reforms and reduction in subsidy
of diesel, cap on the number of subsidized LPG cylinders and new gas pricing guidelines are
other measures, he said.
In reply to a separate question, Minister of State for Finance Namo Narain Meena said a number
of measures have been taken to contain the CAD to reduce the volatility in the currency market
and to stabilize the rupee.
These include compression in import of gold and silver and non-essential items, allowing public
sector financial institutions to raise quasi-sovereign bonds to finance long term infrastructure,
liberalising ECB guidelines, permitting PSU, oil companies to raise additional funds through
ECBs and trade finance and liberalising NRE/FCNR deposit schemes. Meena said.

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Top 10 steps taken to support the currency
1. The Reserve Bank of India (RBI) will provide dollars directly to state oil companies in
attempt to support the rupee that has slumped over 20 percent this year. State-run
companies are the biggest source of dollar demand in markets - worth $400 million to
$500 million daily - and directing them to a special window is meant to reduce pressure
on the rupee.

2. The government will soon issue quasi-sovereign bonds to help bring more dollar inflows
into the country. Under the scheme, state finance companies will sell these bonds to fund
infrastructure development.

3. The RBI will sell Rs. 22,000 crore bonds every week to check the volatility in forex
market.

4. The government has hiked the import duty on gold and silver to 10 percent to rein in the
imports. The RBI has tightened the norms for gold imports by linking them to exports. Also,
credit availability for gold imports has also been tightened.

5. The RBI has reduced the amount of dollar resident Indians can take out of the country
from $2,00,000 to $75,000 in a financial year. Indian companies have to seek RBI's
permission if they want to invest any amount beyond their net worth abroad. Earlier, a
company could invest as much as four times its net worth in an overseas venture.

6. PSU oil companies would be allowed to raise additional funds - $4 billion - through
external commercial borrowings (ECBs).

7. In a bid to attract NRI deposits, the RBI liberalised bank deposit schemes and some banks
raised rates for overseas Indians this month.

8. To spur banks to attract more dollar deposits from NRIs, the RBI has exempted these
deposits from cash reserve ratio and statutory liquidity ratio requirements.

9. The RBI has tightened liquidity to reduce the availability of rupee in the banking system
to reduce rupee volatility. However, these measures have led to an increase in the short-
term interest rates.

10. The government has banned the duty-free import of flat-screen televisions to stem the
flow of foreign currency out of the country. It is estimated that more than 1 million
television sets were brought into the country last year. Under the new rules, airline
passengers will have to pay a 35 percent duty and other charges.
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Role of RBI

RBI has been extremely cautious in its intervention during the entire rupee depreciation crises.
RBI has however reacted with timely interventions by selling dollars intermittently to tame sharp
fall in the currency. The outflow of dollar reserves from RBI coffers has been extremely
cautious, mostly due to the dwindling foreign exchange reserves. The foreign exchange reserves
of India in December 2011 stood at 270 billion USD. Recently RBI has intervened with key
policy initiatives such as intervening in the forward contracts policy. As per new RBI policy the
cancelled forward contracts cannot be rebooked. Exporters in order to rake in more profits, were
booking forward contracts, then cancelling the contracts, and again rebooking at better rate. This
process led to a further depreciation in rupee and fuelled speculations. Also, RBI intermittently
put trading limits for the banks in the foreign exchange market in order to tame the speculative
forces.
Looking at the current economic outlook, the currency crises seems to stay for a much longer
period this time around. However, a structuring of Greek debt coupled with higher inflows from
FIIs can lead to an arrest in the falling rupee.
The Reserve Bank of India announced several steps to stop the slide in the Indian rupee
1. The RBI has increased the Marginal Standing Facility (rate at which banks
borrow from the RBI using their statutory liquidity ratio securities as collateral)
rate. So far, banks (bearish on the rupee) borrowed from call money markets and
bought dollars in the forward markets expecting the dollar to rise. Since,
borrowing short term money will now be costlier, banks will most likely cut their
forward positions and reduce speculative trading. This will reduce pressure on the
rupee.

2. The RBI has capped the amount banks can borrow from overnight markets
to Rs. 75,000 crore. The RBI will also conduct Open Market Sales of bonds
of Rs.12,000 crore on Thursday. These measures are aimed to suck liquidity from
the system. Bond prices will fall and yields will rise. Higher yields will attract
foreign investment back into the debt market at a time when FIIs have sold
billions of dollars ever since the U.S. Fed signalled a tapering of the quantitative
easing.

3. The new steps were announced after RBI's earlier steps to sell dollars in forex
markets through state-run banks failed to halt the slide in the currency. Moves
taken to curb speculative trading last week helped the rupee snap a nine-week
losing streak, but the currency slipped below the psychological 60 mark again on
Monday, necessitating more steps.
22 | P a g e

4. The Indian rupee jumped over 1 per cent to 59.13 in early trades on RBI
measures. Sonal Varma of Nomura said the measures are "a classic textbook
response". These steps will tighten domestic liquidity, raise short-term interest
rates, increase the relative interest rate differential and possibly stem debt
outflows, Ms Varma wrote in a note.

5. As expected, bond yields jumped sharply, with yields on 7.16% 2012 bond edging
above the 8 per cent mark.

6. But stock markets fell, with the Sensex plunging 385 points in early trades fearing
there will be no rate cut later this month. Finance Minister P Chidambaram tried
to calm markets. He said RBI measures were aimed to quell speculation and
volatility in forex markets. "These measures should not be read as a prelude to a
policy rate changes," he added.

7. Analysts said the probability of a rate hike, if today's measures are not successful
in stemming rupee depreciation, has gone up. Nomura said there is a risk that
today's measures could backfire. "India's growth is already very weak and tighter
domestic liquidity will worsen the financial conditions for corporates and banks,
hurting asset quality and the growth outlook," the investment bank said.

8. There are fears that current moves may succeed in stemming debt outflows
(helping the rupee), but growth-sensitive equity flows will be at risk. So, stock
markets will fall further, with banking stocks at the highest risk. Barclays said if
the higher rates were to persist and impact GDP growth then that would impact
the entire banking system negatively. The Bank Nifty slumped over 4.5 per cent
lower, underperforming the broader Nifty.

9. This move will impact the banks and NBFCs in two ways. One, directly through
net interest margins (which will fall) and two, indirectly through the impact on
GDP growth, Barclays said. Yes Bank traded with over 8 per cent cut, while
IndusInd Bank shares shed 7 per cent.

10. These measures are unlikely to send the rupee in a permanent upward trajectory.
The government needs to address fundamental problems such as high current
account deficit, analysts said. Prime Minister Manmohan Singh will discuss a
proposal to increase Foreign Direct Investment (FDI) cap in sectors like telecom,
retail and defense later today. Liberalizing FDI rules will help attract foreign
investment into the country, which is badly needed at a time when the rupee is the
worst performing currency in Asia.
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Conclusion

To increase rupee value, India has to work upon the reasons which are mentioned above and has
to take right decision. As imports are exceeding exports, India should increase exports which will
lead to inflow of foreign currency. With this Country should also control the price of the
products then only demand can be increased. Increase in demand routes to rise in the exports by
mounting the buying capacity of the consumers.
At the same time focusing on FDI is important because FDI will increase the foreign currency
flow into the country. To increase the FDI first of all we should attract the foreign investors by
improving our economic condition which is interrelated with rupee value. It also needs to take
steps to improve investment environment and make India an attractive business destination for
both domestic and foreign investors to prevent excessive volatility and downward pressure on
the rupee. A better co-ordination with RBI is required rather than blame game. Apart from all the
political parties should come together in fixing the problem and getting back the investors
confidence














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Bibliography



Wikipedia
timesofindia.indiatimes.com Aug 15,2013
Bussinesstoday.intoday.in Pritam Hans, Feb 2012.
www.iitk.ac.in
Zeenews.india.com Aug 21, 2013.