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Group 14: Jaimin, Kshitij, Ashutosh & Rajat
The Rising Rupee
Contents
The Rupee’s rise and it’s impact1
Why the Rupee needs to appreciate further ?2
Why the Rupee needs to weaken ?3
Conclusion4
The Rising Rupee
The possible reasons
The Rising Rupee
Market forces behind
Exchange Rates, e
Inflation Increase in PPP e strengthens
Interest Rates
Higher return relative to other
countriesIncrease in
foreign inflows e strengthens
Current Account Deficits
Country spending more
on foreign trade than it is earning
Borrows capital from foreign
sources to cover deficit
Excess demand for foreign currency
e weakens
Public Debt
Country becomes less attractive to
foreign investors
Country’s debt rating reduces e weakens
Terms of Trade
Greater demand for a country’s
exports & increasing
revenues from exports
e strengthens
Political stability & economic
performanceCapital inflows
into the countrye strengthens
Is history for or against it?
The Rising Rupee
• The appreciation of the local currency in a sudden spurge
• Past instances in countries like Columbia ?
Dutch Disease
• Is India a victim ?Dutch
Disease
The Impact
The Rising Rupee
What actually happened!
The Rising Rupee
FY06: Economic growth spurted to
9%
Supply shortages + Excess Demand
RBI hikes interest rate
Firms turn abroad to borrow funds
Capital inflows surge (FIIs, FDIs, ECBs,
Remittances)
RBI intervenes (absorbs dollars)
Money supply, Inflation increase
Impossible Trinity (M – F model)
Rupee appreciates against backdrop of
US meltdown
Capital Inflows
The Rising Rupee
• $3.8 billion last year
• Remittances @ $19.6 billion in first half of 2006
• $12.1 billion in first half of 2006
• Financing of acquisitions at home & abroad
• $16 billion in 2006 – 07
• Banking, Telecom, Insurance, Retail, Airlines
• $32 billion over last 4 years
• $4.6 billion in first 5 months of 2007
FIIs FDIs
NRIsECBs
What actually happened!
The Rising Rupee
FY06: Economic growth spurted to
9%
Supply shortages + Excess Demand
RBI hikes interest rate
Firms turn abroad to borrow funds
Capital inflows surge (FIIs, FDIs, ECBs,
Remittances)
RBI intervenes (absorbs dollars)
Money supply, Inflation increase
Impossible Trinity (M – F model)
Rupee appreciates against backdrop of
US meltdown
RBI’s dilemma
The Rising Rupee
Exchange Rate
Market Volatility
Supply of Currency
Demand for
currency
Volatility in Market
RBI intervenes in FOREX markets
Money supply /
inflation gets affected
What actually happened!
The Rising Rupee
FY06: Economic growth spurted to
9%
Supply shortages + Excess Demand
RBI hikes interest rate
Firms turn abroad to borrow funds
Capital inflows surge (FIIs, FDIs, ECBs,
Remittances)
RBI intervenes (absorbs dollars)
Money supply, Inflation increase
Impossible Trinity (M – F model)
Rupee appreciates against backdrop of
US meltdown
The Impossible Trinity
The Rising Rupee
The Impact
The Rising Rupee
Is history for or against it?
The Rising Rupee
• 1966 1983 (7.8) 2002 (49)
• Rate of growth of exports < Rate of growth of importsEarlier
Devaluations
• Japanese exporters cut export prices
• Shifted domestic production to high value items (Lexus of Toyota & Infiniti of Nissan)
• Shifted foreign production to commodity –type products
The Appreciating Yen (1990s)
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
Inflation and USD/INR
39
40
41
42
43
44
45
46
47
48
49
50
51
52
Ap
r-0
5
Jun
-05
Au
g-0
5
Oct
-05
Dec
-05
Feb
-06
Ap
r-0
6
Jun
-06
Au
g-0
6
Oct
-06
Dec
-06
Feb
-07
Ap
r-0
7
Jun
-07
Au
g-0
7
US
D/I
NR
-0.80%
-0.40%
0.00%
0.40%
0.80%
1.20%
1.60%
2.00%
Infl
ati
on
(M
oM
ba
sis)
Inflation
(Base Year: 1993 - 94)
USD/INR
2 per. Mov. Avg.
(Inflation
(Base Year: 1993 - 94))
Rupee appreciation needs to be allowed to control
inflation
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
On a REER basis, the Indian rupee is estimated to have
depreciated to around 99 in 2006 – 07 down from its
peak of 102 in July 2005
REER
Base Year: 1993 - 94
96
97
98
99
100
101
102
103
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
RE
ER
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
Reduced prices of imported raw material like oil & steel
Hence, reduced cost of production
0
50000
100000
150000
200000
250000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Imp
ort
s in
$ m
illio
n
India (Imports)
Others
Iron and Steel
Capital
Gold Silver and Pearls
Petroleum Crude and Products
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
A stronger rupee would ensure that the trade deficit is
kept in check despite rising oil prices
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
A 10% rise in the rupee, causes an equivalent decrease
in India’s external debt.
Year External Debt of (Rs. Crore)
2005 5,39,389
2006 5,64,280
2007P 6,75,857
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisitions
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
Many large companies that have borrowed money
abroad in recent years are likely to benefit from the
strong rupee
With foreign acquisitions expected to grow in the
coming years, the strengthened rupee would prove to
be an added advantage
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
Cheaper consumable goods
• Consumer electronics
• Apparels
Cheaper travel abroad
• Students
• Tourists
Reduced R&D expenses
• Automobile
• Electronic & Electrical goods
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
• Sterilization is the reduction of interest rates to curb inflation as well as maintain a relatively constant exchange rate amidst increasing capital inflows
• RBI can buy up the excess rupees by issuingbonds (MSS) or increase the CRR
• However, in India’s case, further sterilization would prove to be infeasible
Why the Rupee needs to appreciate further?
The Rising Rupee
Addressing Inflation
Rupee is no longer overvalued
Reduced Production Cost
Trade Deficit
Government External Debt
Reduced Foreign Debts
Foreign Acquisition
Cheaper Imported Goods
Import based foreign investments
Sterilization
Rupee denominated
International debt
Due to an appreciating rupee, people all over the
globe, are getting attracted to this currency
Under such circumstances the government, is
working fast on a scheme to issue rupee
denominated international debt.
The proposal has been mooted by the Department of
Economic Affairs, Ministry of Finance and is being
discussed by policy makers at a higher level
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
19
50-5
1
19
52-5
3
19
54-5
5
19
56-5
7
19
58-5
9
19
60-6
1
19
62-6
3
19
64-6
5
19
66-6
7
19
68-6
9
19
70-7
1
19
72-7
3
19
74-7
5
19
76-7
7
19
78-7
9
19
80-8
1
19
82-8
3
19
84-8
5
19
86-8
7
19
88-8
9
19
90-9
1
19
92-9
3
19
94-9
5
19
96-9
7
19
98-9
9
20
00-0
1
20
02-0
3
20
04-0
5
20
06-0
7
US
D / I
NR
Foreign Exchange Reserves
Exchange Rate
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
• Around 30% of the share of exports to be affected
• More than 86% of exports in USD
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
FII Inflows and USD/INR
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
Ap
r-0
5
May
-05
Jun
-05
Jul-
05
Au
g-0
5
Sep
-05
Oct
-05
No
v-0
5
Dec
-05
Jan
-06
Feb
-06
Mar
-06
Ap
r-0
6
May
-06
Jun
-06
Jul-
06
Au
g-0
6
Sep
-06
Oct
-06
No
v-0
6
Dec
-06
Jan
-07
Feb
-07
Mar
-07
Ap
r-0
7
May
-07
Jun
-07
Jul-
07
Month - on - Month
FII
In
flo
ws
(Rs.
Cro
re)
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
US
D/I
NR
FII in Rupees Cr.
USD/INR
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
• Textile and cotton industries• Exporters considering to layoff 275000
workers by year end
Why the Rupee needs to depreciate?
The Rising Rupee
Forex Reserves
Exports and Exporters
The IT Imbroglio
FIIs on the move
Job Losses
Loss of Business
• Erosion of competitiveness• Business shift to countries with lower
value of exchange rate
Steps taken by RBI !
The Rising Rupee
Rupee Depreciation
Continuous Intervention
Restrictions on ECB
Encouraging Higher Dollar
Spend
Tax SOPs and Promotion
Raising Investment limit
in overseas Ventures
The Rising Rupee
Conclusion
The nation has seen a growth and the economy is rising
India is attracting a large amount of capital inflows
Dealing with these inflows is difficult
Intervening to defend the exchange rate can help reserve
export competitiveness, but it can endanger the inflation
target (Impossible Trinity!!)
LOGO
Your queries are welcome
RBI’s dilemma
The Rising Rupee
Exchange Rate
Market Volatility
Supply of Currency
Demand for
currency
Volatility in Market
RBI intervenes in FOREX markets
Money supply /
inflation gets affected
Capital Inflows
The Rising Rupee
• $3.8 billion last year
• Remittances @ $19.6 billion in first half of 2006
• $12.1 billion in first half of 2006
• Financing of acquisitions at home & abroad
• $16 billion in 2006 – 07
• Banking, Telecom, Insurance, Retail, Airlines
• $32 billion over last 4 years
• $4.6 billion in first 5 months of 2007
FIIs FDIs
NRIsECBs
The Impossible Trinity
The Rising Rupee
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