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Title: - Indian Rupee being depreciated

Author: - Sumesh Mirashi, Guest Lecturer, BBA Dept, Government First Grade College Sirsi
Abstract
In this paper we show that why is Indian Rupee being depreciated, we have tried to look up for the
reasons which led to fall in the value of Indian rupee and thus had several consequences which could have
mixed effects on Indian economy. With interest rate, exchange rate, and money supply as key arguments. The
paper then derives as a monetary policy feedback rule, but, mainly, there are expected implications of falling
rupee. First, it should boost exports; second, it will lead to higher cost of imported goods and make some of the
capital intensive projects more expensive to execute; third, it will increase the cost of dollar loans taken by
companies and increase the foreign debt and fourth, it will slow-down the overall economic growth by
increasing the interest rate and dissuade flow of FIIs. This paper studies the real implications of the depreciation
of the rupee on the Indian economy and shows that in the long run, the Indian market has more to go down and
less to grow with weaker rupee.
Introduction
As the name says, Currency Depreciation it refers to a decrease in value of one currency with respect to
another. For an example If a One Hundred Indian rupee note could buy Two Hundred Sri Lankan rupees today,
and could buy only 150 tomorrow, and we could say that INR would have depreciated by 50 per cent. The exact
opposite logic of this holds good for currency appreciation. With so many changes occurring in day to day
economy the Question lies to a point where we all think about the factors which determine the value of Indian
Currency. Many researchers have laid a taught on the above topic but none has come to a specific conclusion
about these factors.
Before getting into the topic lets get to know the basics of Appreciation, Depreciation, Revaluation and
Devaluation. When the value of the currency goes up as compared to other currency it is known as appreciation.
When the value of currency falls as compared to other currency it is known as depreciation. Devaluation is
when the price of the currency is officially decreased in a fixed exchange rate system. Revaluation is the
official increase in the price of the currency within a fixed exchange rate system.
Major Causes of Rupee Depreciation

Basics of Economics Supply and Demand

The value of a currency, like any traded goods or services, depends on demand and supply. If there is

more demand of dollars in the currency market and is not adequately matched by the supply, other things
remaining constant, the rupee price of dollar will go up or the rupee will depreciate. And, if the supply of dollar

is higher than the demand, the rupee will appreciate. We are referring to dollar as it is the most preferred hard
currency for cross-border transactions.
The supply of dollars depends on two factors exports and investments. When goods or services are
exported, the exporter gets the payment in dollars which is converted into rupees in India, boosting the supply
of dollars. On the other hand, if individuals or companies buy goods and services from abroad, they need
dollars to settle the bills, leading to an increased demand of dollars.

Dollar with a Lion Roar

US Dollar gets into more demand from individuals and institutions that require American currency to

enter into a transaction. And also being one of the main reason causing the rupee to fall is the immense strength
of the Dollar Index, which has touched its three-year high level of 84.30. The record setting performance of US
equities and the improvement in the labor market has made Americans more optimistic about the outlook for
the US economy. Capital preservation is just as important as capital appreciation in the present times and for
this reason the direction of the monetary policy and the consequent implications for the currency has become
very important.

Indian Exchange rate system

Exchange rate is the rate at which one countrys currency can be exchanged for another countrys

currency. Theoretically, there are two exchange rate regimes that countries may opt for. A fixed exchange rate
system refers to the case where the exchange rate is set and maintained at same level by the government
irrespective of the market forces.
Floating exchange rate system means that the exchange rate is allowed to fluctuate according to the
market forces without the intervention of the Central bank or the government.
Fixed exchange rate is a system in which the central bank pegs the value of the domestic currency with
respect to another, regardless of the demand and supply factors. For example, the RBI may fix the value of a
US dollar to 45 INRs. If demand for the US dollar increases, the central bank would offset the increased
demand by flooding the market with excess US dollars from its forex reserves. Thus the parity of 1 US dollar =
45 INRs would be maintained. In this system, since the value of currency remains the same, there is no
currency appreciation or depreciation. Under a flexible exchange rate system, the value of currency is
determined by its demand and supply. The central bank does not interfere in the market to offset demand or
supply factors.

Recession in the European Markets

The rupee is also feeling the pinch of the recession in the Euro zone. For the past month, investors have

been selling Euros and buying dollars on the premise that the Euro zone is in a recession; and they are
considering more stimulus at a time when the Fed is considering less Owing to the uncertainty prevailing in
Europe and the slump in the international markets, investors prefer to stay away from risky investments.
The euro, which was seen holding the key level of 1.30, has dropped lower to 1.28 levels on the back of
deterioration in the local economic data. The credit rating agency's downgrade of India to BBB- with a negative
outlook the last of the investment grade has not helped its cause. Any outward flow of currency or a decrease in

investments will put a downward pressure on the rupee exchange rate. This global uncertainty has adversely
impacted the domestic factors and could lead to a further depreciation of the rupee.

Imbalance at Balance Of Payments

A slowdown in the global economy has adversely reduced the demand for Indian goods. With the

reduction in exports and an increase in imports, on one side the current account deficit has increased while on
the other, the fiscal deficit is also expected to be above the comfort levels due to increased subsidy.
The falling commodity prices on the other hand have increased imports resulting in an imbalance
between payments and receipts. The Government of India was relaxed with respect to the CAD issue as there
was a sharp fall in the commodity prices. A large part of the import bill is driven by other resources as well.
The facts show that fertilizer imports surged by 30% in the last two years and coal imports have doubled.
Therefore, the problem of CAD continues to persist. The Indian economy needs to debug its structural reforms
and the gap between the imports and exports.

Price of crude oil

The worth of crude oil has been a major bane for India since it has to bring in the majority of its

requirement from outside the country. The demand for oil in India has been going up every year and this has led
to the present situation. All over the world, the price of oil is given in dollars. This implies that as and when the
demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a
need for more dollars to pay the suppliers. This also results in a situation where the worth of the INR decreases
significantly in comparison to the dollar.

Investors Walking Back

In the year 2012-13 the Indian companies have spent more outside India compared to FIIs in India.

Posco did not go ahead with a steel plant worth INR 30,000 crore that was supposed to be built in Karnataka.
ArcelorMittal withdrew from setting up a steel plant in Odisha that was supposed to cost around 52,000 crore.
There were lot of delays and problems related to acquiring land for the project.

Contraction of Indian economy

The various important sectors of Indian economy such as manufacturing, mining and agriculture have seen poor
growth in 2013 and this has made them less appealing propositions for the investors. During June 2013, the
aggregate industrial production in India reduced by 2.2 per cent and in July 2013 the RBI predicted that in the
present fiscal there would be a growth of 5.5% which was lesser than its previous prediction of 5.7%.

Equity market
India, in fact, is not the only emerging market where the currency has taken a hit. The situation is

similar in countries like Indonesia, Brazil and Thailand. The bond markets in several countries like India are
also taking a hit as the FIIs are withdrawing en masse. The exchange traded funds are also being redeemed as
the global business fraternity is looking to cut down on risks.
Now if the INR becomes weak then it will affect the investors who are putting their money in India. For
the first time ever since 2012 the FIIs have been reduced to net sellers of debt based securities. The main reason
behind this is the present state of the INR. The expenses incurred in hedging the unpredictable INR are
reducing the yield differential that is the main area of profit for these investors

Our equity market has been volatile for some time now. Equity is nothing but the investments in Indian
companies made by Foreign Institutional Investors (FIIs). Some examples of Private equities investing in India
are Blackstone, IFC, Berkshire Hathaway etc. So, the FIIs are in a dilemma whether to invest in India or not
Even though they have brought in record inflows of dollar to the country this year, chances are they may be
thinking of taking their money out of the equity market, which might again results in less inflow of dollars in
India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee
against the dollar.
Conclusion
We cant predict where the rupee will eventually land; all we can do is Predict. It should also be noted
that, we are not the only country at the influence of the dollar because almost every emerging economy is
facing the same issue. But this shouldnt be an excuse.
INR has depreciated about 50 percent in the past three years and to 15 percent this year. This present
situation is extremely dangerous for our economy because of the direct impact it will have on Indias economic
fundamentals. Inflation led by economic deficit has to be prohibited by eliminating indirect subsidies and
freeing up agricultural trade. To restore the rupee, we need to illustrate the way in deficit. At the same time,
agonizing as it may seem, we need to hold on to interest rates at a real level to encourage household savings.
Taxing imports of luxury consumables and durables; and preventing low-value imports that can be
produced locally, Infrastructure development, and creating a business-conducive environment are essential to
convince the international community about the genuineness of our long term fundamentals, and thus help in
shoring up the rupee. Most importantly, we need a majority government with a clear cut stringent policy for
development.
For now, all India can do is to hold on till the next elections.