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Why Is Indian Currency Falling Economics Essay

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Published: Mon, 5 Dec 2016

The value of Indian currency has weakened over the last 15 years. The Indian rupee fell 0.7 per cent against the US dollar at 55.71 on the back of a weak trade data. The Indian rupee has shed close to 25 per cent value over the past one year. It is likely to fall further.

 1) Exports falling: One of the main reasons for Indian currency falling is the exports falling which leads to trade deficit. The demand for US$ goes up with the increase in trade deficit. India’s trade deficit increased to $ 15.5bn in July 2012 which is significantly higher than $ 10.3bn reported in June 2012. The trade deficit occurs when a country imports more goods and services than exports.

 2) Current account deficit could rise: India is not being able to achieve the export target of $ 350bn. Due to this; India’s current account deficit could be higher than expected. This occurs when import of goods and services is higher than their exports. A higher current account deficit contributes to weaken the currency.

 3) Dependence on foreign flows: In order to finance the current account deficit India needs strong foreign capital. However, the probability of allocating more money by the foreign invertors to India is poor. Therefore, India requires reforms to reduce deficits and to boost up the growth in infrastructure through investment.

 4) Fiscal deficit: A fiscal deficit occurs when government’s expenditure exceeds the earning through taxes and other sources of income. The government borrowing from the Reserve Bank of India shows the fiscal deficit. It is important for countries to keep it under control. A large fiscal deficit forces central banks to print more money and stoke inflation which decreases the value of money.

 5) Growth slows: To sustain the high expenses and boost exports, India needs a strong growth rate. However, the balance of payment is not positive. It is expected that India will grow at less than 6 per cent in 2012-13 and at the same time, a weak monsoon could again increase the food price. This leads to inflation.

Appreciation and depreciation for Indian currency:

Rupee is the Indian currency. Just like any commodity the Rupee also has a price which keeps fluctuating. The US Dollar being universal currency, all prices of currencies are generally expressed in Dollars. Hence in case of the Rupee, its price at any point in time maybe say, Rs.45/$. With the change of the indicators the value of the rupee as per the dollar changes. When value of Indian currency increases i.e. say Rs.40/$ it is said to have Appreciated (Value) in the reverse case say Rs.50/$ then the Rupee Depreciates (Value).

Rupee changes values for a range of reasons, like if US performs very well then people will demand more US dollars, exchanging their rupee. This Demand will raise the price of the US dollar and hence depreciate the Indian Rupee .For e.g.:  Let us assume that in case, you go to a bank and asks the bank that you intend to buy US$100, please tell me what is the amount of INR you have to pay.   Bank informs you that you need to pay Rs 5410/-.  This means you can buy US$ @ Rs.54.10 per dollar.   This is the selling rate of the said bank for US $ for that day.

Now after one month, you go to bank and again ask the bank that you wish to buy US$ 100, and bank tells you that this time you have to pay Rs.5490.  This means you have pay more to receive the same amount of US $.   This means the local currency has depreciated.

This will be known as Depreciation of Indian Rupee.  In the above example, it is clear that value of INR has gone when compared to US$.

On the other hand, if the rate quoted by bank on second occasion is say Rs. 5380/-.   It will be considered as appreciation of INR as this time you have to pay less amount to buy the same amount of US$.

 

How weakening rupee against dollar impact India?

The Weakening rupee against the US dollar makes the imports, overseas travel and studies at foreign universities more expensive. The sharp fall of Indian currency against the US dollar rises the price of edible oil, petroleum products, fuels and white good. White goods and phone maker are considering a 2-10% increase in prices. But weakening the rupee against dollar is cheering exporters and families that depend on remittances.

Some of the impacts of weakening rupee against dollar in India are as follows:

More rupees for dollars remitted.

Exporters get more rupees against dollars.

As foreigners will have to pay fewer dollars for vacationing in India tourism may get little hike.

Students wanting to study abroad will have to pay higher fee and living charges in rupee terms. More rupee would be needed to fund foreign education.

Travelling overseas get more expensive as one has to shell out more rupees for the same amount of dollars. One would have to keep more rupees on hand to purchase dollars to fund foreign travel.

Imports to get costlier.

Companies will have to pay more for repaying foreign debt.

The price of oil, petrol, diesel and fuel will go up substantially. The LPG could also become high. As the result of price hike of fuel, the transportation cost will also go up and the increase in the transportation cost leads to rise on the price of the goods causing higher inflation. Higher oil import bill could put greater strain on government finances, given clamor for higher subsidies.

Electronic goods which depend on imports and royalty become more expensive.

NRI and exporters would be happy and can be expected to remit more dollars as they would get a higher price. Companies like IT software, Pharmacy and BPO would gain from the dollars that they earn by providing goods and service abroad.

How far will it fall?

Currently $1=53.58 but the experts have predicted that it may hit 55 in 2013(this year) given the weak fundamentals of the economy.

RUPEE APPRECIATION IN RELATION TO DOLLAR:

The appreciation of rupee affects the whole economy. Appreciation occurs because of the inflow of dollar and the rupee is pushed higher be exporters selling pressure. Another reason for appreciation of rupees is increase in flow of funds through foreign institutional investors. The appreciating rupees also affect various sectors of economy both positively and negatively.

RUPEE APPRECIATION IN RELATION TO DOLLAR AS A BOON

® By the appreciation of the rupee, importers are benefited the most. They have to pay fewer rupees in terms of dollars i.e. more dollar denominated goods can be purchased from lesser amount of rupee.

®€ Energy(oil, fuel, petrol, diesel, etc) dependent sectors will benefit more comparing to others since import cost will decrease.

®€  The profit margin of the companies importing the raw materials from the foreign market to produce the goods having domestic demand will increase.

®€ The cost of machineries and equipment that are imported will be lesser which benefits the capital goods sectors.

®€ It is also a good sign for government’s financial health because in the long run a stronger rupee would be sound for the Indian economy and will bring India’s purchasing power at par with other currencies.

®€ Appreciation of rupee also benefits the oil marketing companies like BPCL, HPCL, and IOC which purchases crude oil from abroad.

®€  rupee appreciation is a good sign for any currency. In a long run the rupee may gain more value as currency due to strengthening the rupee value in the foreign exchange marker.

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RUPEE DEPRECIATION IN RELATION TO DOLLAR

Since the independence till today rupee is continuously depreciating. It had reached the level of 53.58 in February 2013. However service export and NRI remittance witnessed solid which resulted in current account surplus and a turnaround for the country running in trade deficits in the past.

Gradual depreciation of the rupee contributes to substitute direct export subsidy. Lower rupee benefits exporter as the exporter can lower the price and sell in the foreign market.

RUPEE DEPRECIATION IN RELATION TO DOLLAR AS A BOON

® Rupee depreciation can attract overseas buyers which helps the exports to grow faster.

®€ Rupee depreciation can increase export which also increases the export competitiveness that helps the economy to grow. It becomes easier for the exporters to survive in the foreign market as they can lower the price to increase sales volume.

®€ India’s foreign structure also support weak rupee since it includes leather, textiles, gems and jeweler and most of the manufacturers and exporters are medium and small sized who are operating on low margins and they can not absorb currency risks but weak rupee can allow them to sell their product at lower price.

®About two-thirds of India’s IT revenue is in terms of dollar. So for the IT companies, the weakening rupees means an increase in the operating profits as they will receive more rupees for each dollar earned.

®The export of textile business with lower profit margins will go up with the depreciating rupee which directly benefits the textile industries

®Depreciating rupee is like an invitation to commodity sector. US being the largest importer, majority of the Indian commodity exports are dollar denominated. The metal companies especially the iron-ore exporters would be benefited as they will have gains accruing from lower global commodities prices on account of rising dollar.

RUPEE DEPRECIATION IN RELATION TO DOLLAR AS A BANE

®Importers are the biggest losers from the depreciation of the rupee as they have to pay more rupees in terms of dollars i.e. less dollar denominated goods has to be purchased by paying higher amount of rupee.

® The cost of import will increase which also increases of oil, fuel, petroleum products etc.

®The profit margin of the companies importing the raw materials from the foreign market to produce the goods having domestic demand will decline.

® As large number of machineries and equipments are imported in the capital goods sectors it is not beneficial for such sectors.

® A weaker rupee means weaker India’s purchasing power as compare with other currencies. This affects the financial condition of the government and the country in the long run.

®Oil marketing companies like BPCL, HPCL, and IOC which import crude oil will have to pay higher import bill with the fall in rupee which will adversely affect the oil market.

®Telecom companies like AIRTEL, Idea with huge requirement for import capital expenditure stand to lose from a fall in the rupee value.

® Depreciation is not a good sign for any currency. In a long run the rupee may lose its value as currency due to weakening the rupee value in the foreign exchange marker.


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