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Volume - 5 | Issue - 6 | March - 2016
“FALLING VALUES OF INDIAN RUPEE V/S USD $”
Yash Parashar
Scholar, SOE DAVV, Indore.
ABSTRACT:
The falling in the value of Indian rupee has several consequences which could have mixed
effects on Indian economy. But, mainly, there are four expected implication 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 slowdown 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 Indian economy and shows that in the long run, the Indian economy has more to
lose and less to gain with weaker rupee.
KEYWORD: - Falling value of Indian currency, Rupee-Dollar, devaluation, & FII.
Available online at www.lsrj.in
1
“FALLING VALUES OF INDIAN RUPEE V/S USD $”
INTRODUCTION:
A falling currency may be normal and acceptable when the economy is slowing, but slowing, but
the rupee’s apparent free fall over the last few months – more than 15% since August--- is serious blow
to the Indian economy. Though a depreciating rupee is not surprising given India’s international
investment position, with its higher rate of liabilities than assets, such a sudden fall is worrisome. There
has been no spectacular or abrupt change in the Indian Economy’s macro fundamentals over the last
couple of months that could have possibly triggered the rupee’s fall, making it Asia’s worst performing
currency. But there are multiple factors, both domestic & international, which are responsible for the
current scenario, ‘Policy paralysis; tight monetary policy; high inflation; and a gradual, overall
weakening of macro fundamentals have slowed Indian’s growth. The rupee’s rapid fall reflects
investors’ lack of confidence in the Indian economy, which is expected to grow at around 7% this year,
lower than the previous target of 8.5% . Slowing growth can also be attributed to the looming European
debt crisis, as most of the European banks and financial institutions have significant exposure in
developing countries. The outflow of capital (as investors pull out of India) and slow capital inflows over
the last few months have both contributed to the problem. Thought the Reserve Bank of India (RBI)
could intervene in the market to reduce volatility and mitigate panic, It is yet to take any action and for
the time being is leaving the markets to determine the rupee’s value. The finance minister’s view is that
intervening in the foreign exchange market may not work given the global uncertainty caused by the
European crisis and be withdrawal of fund from Indian by foreign institutional investors. But the central
bank’s governor has hinted that market intervention may be used in necessary. Perhaps the RBI should
have intervened last year when the rupee was appreciating, instead of leaving it entirely to the market.
Objectives of the study -:
1) To Know about the trend of Indian Rupee And it exchange rate against us $ historically.
2) To understand the cause of falling value of Indian rupee and its effects on Indian Economy.
3) To study the real implications of govt. policy for control excessive fluctuation of rupee in Indian
economy.
4) To understand the causes for decline of the rupee against dollar.
Journey of Indian rupee since independence in 1947 -: Though at the time independence i.e., on 15th
August 1947 the exchange rate between Indian rupee and US Dollar was equal to one (i.e., I US Dollar =
1 Indian Rupee).As there was no outside borrowing / loans on the balance sheet of India. But when
British left India, Indian economy was in a paralyzed and begging state thus under the resilient
leadership of then Prime Minister of India Pt. Jawaharlal Nehru, the path of overall development of
India was developed and formulated in the form of five year plan to address below problems:
Poverty
¦
Foreign Trade
¦
Necessity of fast industrialization
¦
Increase in population
¦
Growth and improvement of natural resources
¦
Capital insufficiency and market limitations
¦
Thus, the first five year plan (1951 – 1956) was introduced to revitalize Indian economy and
improve the standard of living of Indian people by prudent usage of natural resources and thus the
overall development of Indian and its people by who suffered during British régime.
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“FALLING VALUES OF INDIAN RUPEE V/S USD $”
History of Indian RUPEE VS US $ -: From 1950 to 1973 Indian Rupee was linked to British pound. In
1966 and 1973 devaluation happened. On 24th September 1975, the connection between Indian
rupee and pound was broken in 1975; the rupee ties to the pound sterling were disengaged. India
established a float exchange regime with the rupee’s effective rate placed on a controlled, floating basis
and linked to a basket of currencies of Indian’s major trading partners. In 1993 Liberalized exchange rate
system (LERMS) was replaced by the unified exchange rate system and hence the system of market
determined exchange rate was adopted. However, the Indian rupee and its exchange rate historically.
Table-1 Values of Indian rupee against us dollar since 1947 – 2015
(Approximate. Average for the year)
HISTORICAL INDIAN RUPEE RATE (INR)
YEAR
INR/USD
YEAR
INR/USD
YEAR
INR/USD
1947
1952
1966
1973
1974
1975
1976
1
4.75
7.10
7.66
8.03
8.41
8.97
1986
1987
1988
1989
1990
1991
1992
12.60
12.95
13.91
16.21
17.50
22.72
22.72
2002
2003
2004
2005
2006
2007
2008
48.62
46.60
45.28
44.01
45.17
41.20
43.41
1977
8.77
1993
28.14
2009
48.32
1978
8.20
1994
31.39
2010
45.65
1979
8.16
1995
32.43
2011
46.61
1980
7.89
1996
35.52
2012
53.34
1981
8.68
1997
36.36
2013
58.53
1982
9.48
1998
41.33
2014
61.00
1983
10.11
1999
43.12
2015
62 - 63.50
1984
11.36
2000
45.00
1985
12.34
2001
47.23
Average annual currency exchange rate for the Indian Rupee (Rupee per U.S. Dollar) is shown in
this table 1973 to present.
All data and calculations on this page are based on the average daily rate per
calendar month for INR/USD.
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“FALLING VALUES OF INDIAN RUPEE V/S USD $”
Historical exchange rate summary: INR/USD
Average (Last 12 Months)
61.32
Average (Last 10 Years)
49.35
High (Last 12 Months)
62.71 (December, 2014 )
Low (Last 12 Months)
59.28 (May, 2014)
High (Since January, 197 3) 63.65 (September, 2013 )
Low (Since January, 197 3)
7.27 (June, 1973)
Sourcehttp://www.forecast-chart.com/usd-indian-rupee.html
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=15268
Indian Rupee at its prime during independence -: Not many are aware that when the British left India,
Indian rupee was valued at par with the dollar, Rs 1 = USD 1. This censured that Indian had an equal
opportunity as any other country to flourish economically. It also ensured India to make macro-level
financial decisions that will not be hampered by a weak Indian rupee during Independence India did not
have any foreign borrowings. But with the introduction of the Five Year Plans, large scale foreign
borrowing started. It resulted in the devaluation of the Indian rupee. The Chart below clearly shows
how rapidly we have descended in the value scale since then:
Indian Rupee to USD Currency Exchange Rate since 1947 (Source: The Economic Times, 2015)
Impacts of Rupee depreciation:
Volatility in the equity market - The equity market in India has been volatile for a certain period of time.
This has put the FIIs into a dilemma as to whether they should be investing in India or not. In recent
times their investments have touched a unprecedented level and so if they pull out then the inflow will
go down as well.
As per a report in business today, the international investors in India have withdrawn to the tune
of INR 44,162 CR during June 2013 & this is a record amount. This has also created a current account
deficit (CAD) that is only increasing, thus contribution significantly to the depreciation of the INR.
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“FALLING VALUES OF INDIAN RUPEE V/S USD $”
Dollar On A Strong Position in global market - The main reason behind rupee 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 investors more
optimistic about the outlook for the US economy
Direct Impact on Consumers a. Travel expenses rise as crude oil gets costlier
b. Inflation leading to price rise in essential goods
c. Foreign Travel and Overseas Education becomes costlier: Students who are studying abroad will bear
the brunt most owing to depreciating rupee. Expenses incurred towards the university/college fee as
well as that of living will shoot up, thereby spelling a huge burden on the students.
Performance of dollar with respect to other currencies - The central bank across Japan and countries
in the Euro zone have been bringing out a lot of money and this has meant that both YEN and EURO have
lost their value. Compared to this the US federal reserve is giving hints that it will end the fiscal stimulus
so that the dollar becomes stronger with respect to other currencies such as the Indian Rupee at least
for the time being. Till now 2015. The US dollar index has become stronger by 2.10%.
Impact of Commodity Prices in Global - As there was a sharp fall in the commodity prices (of gold and
crude oil) in global market still 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.
The falling commodity prices on the other hand have increased imports resulting in an imbalance in the
rupee value.
Increase in Import Bill - A depreciation of the domestic currency results in higher import costs for the
country. Failure of a similar rise being experienced in the prices of exportable commodities is going to
result in a widening of current account deficit (CAD) of the country.
Current Account Deficit - The rising current account deficit possibly due to the severe problems that
the Euro zone is facing is a probable candidate. Note that the Euro Zone is one of India's major trading
partners. The rising current account deficit has depleted our foreign exchange reserve and thus led to a
fall in the value of the rupee.
Higher Inflation- India has experienced high inflation, above 8%, for almost two years. Increase in
import price of essential commodities such as crude oil, fertilizer, pulses, oils, coal and other industrial
raw materials are bound to increase the prices of the final goods. Thereby making it costlier for the
consumers and hence inflation might be pushed up further.
RBI’s 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 borrower’s
woes who are eagerly waiting to get rid of the high loan regime. If RBI cuts rates further, the interest rate
arbitrage (between Indian government bonds and US Treasury yields) becomes less attractive, thus
compromising the possibility of further capital flows.
Exporters & speculators- Importers will strongly feel the pinch of falling rupee as they will be forced to
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5
“FALLING VALUES OF INDIAN RUPEE V/S USD $”
pay more rupees on importing products. Conversely, a feeble rupee will bring delight to the exporters 6
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. India's currency history is a spectacular continuum since the ancient ages to the current roughand-tumble of a globalised economy, with each era's coinage, and worth, broadly imitating the
prevailing political, social and economic environment.
Interest Rate Difference- Higher real interest rates generally attract foreign investment but due to
slowdown in growth there is increasing pressure on RBI to decrease the policy rates. Under such
conditions foreign investors tend to stay away from investing.
Slowdown of growth and Unemployment- Falling rupee is a recipe for slowdown in economic growth.
If the fall of rupee continues, the foreign investment will dry in India thereby creating a gap between
investment required for growth and the actual investment made. Although this does not impact
immediately, over the period, unemployment rises in the economy
Devaluation during 1966
Since 1951, despite government attempts to obtain a positive trade balance, India experienced
a severe balance of payments deficits. Inflation caused Indian prices to go sky high. When the exchange
rate is fixed and a country experiences high inflation relative to other countries, that country’s goods
become more expensive and foreign goods become cheaper. Therefore, inflation tends to increase
imports and decrease exports. Since 1950, Indian continuously faced trade deficits. Another reason,
which played important role in the 1966 devaluation, was war with Pakistan. The US and other
countries withdrew their aid, which further necessitated devaluation. To improve fiscal position,
Government of India devalued Rupee by huge 57% against Dollar
Devaluation during 1991
In 1991, India still had a fixed exchange rate system, where the rupee was hooked to basket of
currencies of major trading partner countries. At the end of 1990, the Government of India found itself
in serious economic trouble. The government was close to financial default and its foreign exchange
reserves had dried up to the point that India could barely finance three weeks of imports. In July of 1991
the Indian government devalued the rupee by 19.5%. The government also changed its trade policy
from its highly restrictive form to a system which allowed exporters to import 30% of the value of their
exports
Devaluation during 2013
The Indian rupee touched a lifetime low of 68.85 against the US dollar on August 28, 2013. The
rupee plunged by 3.7 percent on the day in its biggest single-day percentage fall in more than two
decades. Since January 2013, the rupee has lost more than 20 percent of its value, the biggest loser
among the Asian currencies
Revaluation
In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 USD =
INR 44–48. In late 2007, the Indian Rupee reached a record high of Rs.39 per USD, on account of
sustained foreign investment flows into the country. This posed problems for major exporters, IT and
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6
“FALLING VALUES OF INDIAN RUPEE V/S USD $”
BPO firms located in the country who were incurring losses in their earnings given the appreciation in
rupee. The trend has reversed lately with the 2008 world financial crisis as Foreign investors transferred
huge sums out to their own countries. Such appreciations were reflected in many currencies, e.g. the
British Pound, which had gained value against the dollar and then has lost value again with the
recession of 2008.
The Indian economy growth
The Indian economy is steadily improving with a forecast to grow at 8.5% in the next financial
year which is fastest among emerging countries, said by Raghuram Rajan, RBI Governor. And, it has
been predicted that RBI will further cut the benchmark rate by additional 50 points to give boost to the
investor’s moral, stabilization of Indian rupee to accelerate growth and to target inflation.
Rajan also stated that he is very positive about budget of FY 2015 -16 and said that the many
medium term steps proposed by the government in the budget of FY 2015 – 16 will undoubtedly work
as a catalyst in the path of India becoming center of the world’s financial activity.
Therefore, based on above information’s about ongoing financial market trend it is predicted
that the exchange rate in 2015 would 1 USD = 62 – 63.50 INR.
CONCLUSION
Thus we can see that since 1947 besides few appreciations rupee is depreciating against US
Dollar and the causes of depreciation are invariable different. Even after taking few measures by
government if we see the resent depreciation, rupee depreciation has abated but it still remains under
pressure. Both domestic and global conditions are indicating that the downward pressure on Rupee to
remain if future. Thus RBI should likely to continue its policy mix of controlled intervention in forex
markets and administrative measures to curb volatility in rupee. Apart from RBI government should
take some measures to bring FDI and create a healthy environment for economic growth. Some
analysts have even suggested that Government should float overseas bonds to raise capital inflows.
REFERENCES
1) Amit Kapoor (2007) “Rising Rupee & India Growth Story” the Economics Times, AUG.29.
2) Jitendra Sahai (1982) “Dollar in India”, Published by National Publishers, 1982.
3) Nagendra Chowdhary “Dynamics of Exchange Management” , ICFAI Books.
4) C.R.L.Narsimhan (2014) “Rising Rupees Hidden Massage”, The Hindu,
5) Lavanya, C.N.M. (2011), The Impact of Rupee Depreciation, The Hindu,
6) RBI Website retrieved from
https://www.rbi.org.in/Scripts/BS_ViewPublicationReport.aspx
7) New India Express article retrieved from
http://www.newindianexpress.com/business/news/The-volatile-journey-of-Indian-rupee-sinceindependence/2013/08/15/article1735949.ece
8) Global Research article retrieved from
http://www.globalresearch.ca/collapsing-asian-currencies-why-is-the-indian-rupeedepreciating/5350017
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