Indian Rupee value against U.S. Dollar is hitting all time low. For past few months a significant down fall has been noticed in the value of Indian rupee. In the month of August value of rupee against USD reached to 68.8 by touching all time low. Reserve Bank of India took several steps to control the down fall of rupee in order to protect economic balance. This paper intends to discuss causes and effects of Indian rupee depreciation. The paper will further elaborate benefits of depreciation to Indian economy, internal and external factors, and necessary measures, to be taken by the government of India and Reserve Bank of India to control the depreciation.
Causes of Indian Rupee Depreciation
Domestic as well as global factors, both are responsible for downfall of rupee against US dollar. Huge current account deficit and economic growth are major domestic factors. Global factors include expected recovery of American economy due to potential termination of loose monetary policy which encourages investors to pull their money from Indian market and invest it in American and other emerging market. This resulted in shortage of US dollar in India. Firefighting among Indian authorities also damages rupee significantly. When Government approved Foreign Direct Investment, Reserve Bank of India increased interest rate to protect the currency. FDI can yield results only in long-run whereas RBI initiatives have low impacts for short-term. RBI increases short-term rates two times within two months July and August on the other hand rupee is continuously declining. This results in creating confusing state of monetary policy which further declines the value of rupee (Firstpost Economy, 2013). RBI further baffled the situation by announcing the purchase of bond which intensifies the sales of rupees.
Increasing demand of crude oil, volatility in stock market, import bill condition and poor growth of major industries such as agriculture, mining, and manufacturing, contributed towards rupee downfall. In August RBI placed a restriction on investment in foreign market by Indian companies and people, import of gold coins was also banned. Capital restrictions become threat for traders as it could damage performance of businesses. In May and June there was USD 1.1 billion withdrawals from NRIs (Non-resident Indians) accounts. However RBI eased rate limits but it will impact in long-run. Measures taken by RBI were not sufficient to improve the situation instantly (Samudranil, 2013).
Effects of Rupee Depreciation on Indian Economy
Indian rupee depreciation against US dollar effects Indian economy at all levels: government, Businesses and citizens of the country. Import has become expensive because of depreciation of rupee which results in higher prices of all imported goods including crude oil prices. India largely depends on imported crude oil to fulfill its needs hence importing crude oil is burden on government and consumer when value of rupee is depreciated. Every fall in rupee value increases Rs. 9000 cr. burden on government in terms of subsidy which further increased fiscal deficit (Jain, 2013).
Burden of Companies who have taken loans from international market also increases due to increase in pay-out because of lower value of rupees. Increase in liability forcing companies to reduce their expenditure and cut down avoidable cost to balance the burden. Companies lay off employees to reduce their expenditures which cause unemployment. Downfall in value of rupee increases the price of imported goods and technology which ultimately increases the cost and expenditure of companies and further prices of end products (The Finance Society, 2013). Individual get impacted by higher prices of products, expensive education in foreign countries, higher EMIs on loans, and low or zero return on investments.
Benefits of Rupee Depreciation to Indian Economy
Sharp decline in value of money is a matter of concern for all economists, government and individuals. However, despites of various negative aspects this decline has some collateral benefits for certain businesses. Exporters who are supplying their products or goods in foreign market are getting benefited by this decline because now they are gaining more rupees for similar quantity of supply. Indian exporters received approximately $300bn during last fiscal year. India’s major category of exports includes agricultural goods, gems and engineering goods. Any depreciation in rupee will fetch more money to exporters (Crabtree et al., 2013).
India has noticed narrowing down the trade gap in past few months because of increasing value of export. India’s competitive sector such as Information Technology is also getting benefited by depreciating value of rupee. Software export industry noticed good performance due to higher pay-in. Sales of exports products has registered increase because decline value of rupee increases the competitiveness of export goods. However, it is true that the cost of goods production and end products also goes up due decline in rupee value but it is comparatively lesser than increase in sales value. According to a report Cost of IT products wet up by around 5 percent whereas revenue went up around 12 percent (Kumar, 2013). This shows that companies are making profit.
Measures Required Curbing the Rupee Downfall
Some effective steps are being taken by government of India and reserve bank of India in order to curve the fall of Indian rupee. Reserve bank of India is planning to supply US dollars directly to enterprises run by state as these enterprises are largest demander of US dollars which is almost $ 400 to $500 per day. Government is planning to raise import duty on commodities like gold and silver in order to minimize the demands of these items along with hardening the norms for import of these items. In order to attract foreign funds, reserve bank of India has raised the interest rates on foreign deposits which is meant to target non resident Indians (Shrivastava, 2011).
Steps to Balance the Rupee
Reserve bank of India is selling bonds worth Rs. 22000 crore in order to check the volatility of foreign exchange markets. Reserve bank of India is going to tighten the flow of liquidity in Indian markets. The government of India is going to ban duty free imports from some countries. This step is supposed to affect Indian market as India is one of largest importers of such items. Oil companies of public sector are allowed to raise foreign funds by the help of external commercial borrowings (Singh, 2013).
Internal Factors
Current account deficit is high which is affecting growth of the Indian economy and in this course Indian rupee weakens. Since growth is low, exports are also low and it somehow stops inflow of foreign funds. Some policies of reserve bank of India and government of India contradict each other and rupee suffers the consequences of this firefighting. Reserve bank of India as started tightening its monitory policy and it creates confusion among domestic as well as foreign investors. The policies of Reserve bank are a major reason behind fall of rupee on the other hand government has also failed to assure investors and market that some concrete steps are going to be taken which will also be in interest of market and investors.
External Factors
Signs of recovery in US economy are major external factor that impacts the rupee and strengthens US dollar against Indian rupee. US business houses are pulling their money back from India and investing into their own country. Central bank of US has allured these business houses and investors by attractive monitory policies. Lack of liquidity or inflow of foreign funding has also hit the Indian rupee very hard but authorities have failed to attract foreign funding so far.
Bible perspective of the issue
Bible suggests to control on greed and regulate internal economic factors rather than depending on external factors. If Indian people don’t buy gold and silver and minimize the use of fossil fuels, rupee will be very strong. Secondly bible says to concentrate the internal issues which we can see in Indian context. Policies of government and reserve bank are contradicting and confusing which aggravates the situation further.
References
Firstpost Economy. (2013, August 23). Retrieved November 2, 2013, from www.firstpost.com: http://www.firstpost.com/economy/decoder-why-rupee-crossed-65-against-dollar-1038125.html
J. Crabtree and A. Chilkoti and A. Kazmin. (2013, September 2). Indian Ecoomy. Retrieved November 3, 2013, from www.ft.com: http://www.ft.com/intl/cms/s/0/3f04bff6-13a4-11e3-b0b4-00144feabdc0.html
Jain, P. (2013, Aug 10). The Indian Economist. Retrieved Nov 3, 2013, from theindianeconomist.com: http://theindianeconomist.com/rupee-depreciation-cause-and-effects/
Kumar, R. (2013, September 6). International New York Times. Retrieved November 3, 2013, from india.blogs.nytimes.com: http://india.blogs.nytimes.com/2013/09/06/declining-rupee-brings-gains-for-it-giants-woes-for-small-units/?_r=0
Samudranil. (2013, August 29). Maps of India. Retrieved November 2, 2013, from www.mapsofindia.com: http://www.mapsofindia.com/my-india/india/why-is-the-indian-rupee-depreciating
Shrivastava, O. S. (2011). International Economics. New Delhi: Concept Publishing Company.
Singh. (2013). Indian Economy. New Delhi: Tata McGraw-Hill Education.
The Finance Society, F. (2013, November 2). Life@FMS. Retrieved November 3, 2013, from www.thelegist.net: http://www.thelegist.net/lifeaf/2012-05-19-12-44-16/finance/55-rupee-depreciation
