Rupee volatility - Managing Finance | Online Mini MBA (Free)

RUPEE VOLATILITY

What is the news?

Source: http://www.dollars2rupees.com/Charts

From average Rs. 44 in July 2011, it is now hovering between Rs. 57 and Rs. 58

 Indian Rupee has depreciated more than 25 per cent since 2011 against the USD!

Rupee under attack!

For example: Rupee versus US Dollar

Why is the “rate” so important?

Exchange rate

price of a country’s currency in respect to other country’s currency

Example: USD vs INR, GBP vs INR, Euro vs INR

Foreign Exchange market

a place to convert currency

authorized currency dealers

Conversion rate

usually the Spot rate

Forward rate

Inter-bank rate (IBR) for buying and selling

What leads to fluctuations? As simple as Demand and Supply Too much dependency on imports When Foreign investors take away the monies! Grim global economic outlook

essentially due to the European debt crisis PIGS!

Lack of firm initiative by government on issues such as allowing FDI in retail.

Recent debacles have further rendered the Indian market unattractive to a certain extent (2G, Coalgate)

Weaker Capital markets Upbeat US jobs Speculation that US Federal Reserve may cut back on

investments into Emerging markets

Portugal, Italy, Greece and Spain

Leads to costlier imports i.e. higher import costs Oil imports, Capital goods, Iron and Steel, Coal,

fertilizer, pulses, edible oils Cost of overseas study!

Leads to inflationary pressures Increase in import prices of essential commodities are

bound to increase the prices of the final goods. This makes it costlier for the consumers and hence

inflation might be pushed up further. Higher borrowing costs

Foreign currency loans are cheaper due to interest rate differentials

But exchange rate fluctuations may negate it

What is the worry?

Increasing Fiscal Deficit! The difference between total revenue and total

expenditure of the government. Indication of total borrowings needed by government

What is the bigger worry?

Difficult to attract foreign investment if fiscal deficit remains high

Increasing Fiscal Deficit!

Worsening Current Account Deficit

when a country's total imports of goods and services is greater than the country's total export of goods and services.

Balance of Payments (Imports less Exports) worsens makes a country a net debtor to the rest of the world.

What is the bigger worry?

Current Account Deficit

Current Account Deficit

(Toys etc!)

11-1210-1109-1008-09List of Imports

High imports: Oil and Gold

Current Account Deficit

Germany

China

Japan

Increasing Fiscal Deficit!

Worsening Current Account Deficit! Exchange rate risk drives away foreign investors

which in turn depreciates the local currency! A key attraction of “higher interest rate” is lost

Credit rating agencies also downgrade India’s rating. Sovereign rating of a country determines

investment potential into the country Thankfully Fitch recently revised India’s outlook to

stable from negative! Impact on Exporters

though benefit initially, also feel the pinch due to: adverse effect on inflation sluggish demand from western world

What is the bigger worry?

Economic turmoil Slower GDP Hardly at 5% (back to 1991s!)

Political turmoil Central Elections next year Do we have a stable party? Lack of leadership

SCAMs! nearly add up to $1.8 Trillion

Adding fuel to the fire!

VVIP Chopper Deal  ScamCoalgate!2G SpectrumCommonwealth gamesTelgi Stamp PaperSatyamHarshad MehtaFodderHawalaBofors

Is India’s rupee only fluctuating?

This is 2013 comparison

Shows South African Rand, Japanese Yen have also suffered big time recently

RBI’s role:

Using Forex reserves (nearly $300 billion) Easing Control norms

can increase the FII limit on investment in government and corporate debt instruments.

can invite long term FDI debt funds e.g. infrastructure sector.

can enhance the ceiling for External Commercial Borrowings (ECB) to allow more ECB borrowings.

Initiate key policy reforms rolling of Goods and Services Tax (GST), Direct Tax

Code (DTC) etc. to enable free flow of currency i.e. supply and demand coherence

How to combat?

Thank You

Shekar Kupperi

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