DEVALUATION OF RUPEE DEVALUATION OF RUPEE

1. Strengthening of US dollar due to the decline in monetary policy of 'quantitative easing' by the US Federal.

2.Significant rise in domestic demand for gold Imports as has led to depreciation of rupee due to increasing Current account deficit as India has to pay sell its Forex reserves for gold imports.

3.Fiscal deficit in the Central budget is increasing at an alarming rate and at present it is at 4.5% of GDP. This deficit is financed by hot money flows and from FDIs.

4.The recent downgrading of India by international rating agency has made India less attractive destination for foreign investors.

MAJOR CAUSES FOR THIS PERSISTENT DECLINE IN THE VALUE OF RUPEE:

5.Policy- paralysis prevailing in the country has adversely affected the sentiments foreign investors and this has led to flight of dollars from foreign institutional investments (FIIs).

6.Due to economic crisis going in Europe as well as other parts of world, India's export has contracted significantly and which has resulted in adverse Balance of Payment conditions.

7.High inflation rate in the economy for quite a long time has resulted in the fall of nominal value of rupee.

RBI INTERVENTION AND GOVERNMENT RBI INTERVENTION AND GOVERNMENT POLICIES POLICIES

Functions of RBIFunctions of RBI

• Acts as the Monetary Authority

• It is the regulator and supervisor of the financial system

• Manager of Foreign Exchange

• Issuer of currency

• Developmental role

• Related functions like a)Banker to Govt and b) Banker to banks

Challenges before RBIChallenges before RBI

• Rupee Appreciation

• Forex Reserves

• Capital Account Convertibility

• Economic Growth v/s Inflation and deflation

The RBI has increased the Marginal Standing Facility (rate at which banks borrow from the RBI using their statutory liquidity ratio securities as collateral) rate. Since, borrowing short term money will now be costlier, banks will most likely cut their forward positions and reduce speculative trading. This will reduce pressure on the rupee.

The RBI has capped the amount banks can borrow from overnight markets to Rs. 75,000 crore.. These measures are aimed to suck liquidity from the system. Bond prices will fall and yields will rise. Higher yields will attract foreign investment back into the debt since the U.S. FRS signalled a tapering of the quantitative easing.

STEPS BY RBI

RBI has responded with timely interventions by selling dollars intermittently

Reserve bank has announced that there will be no changes in the

• current repo rate of 7.25% ,• reverse repo rate of 6.25% • cash reserve ratio of 4%.

The government is continuously monitoring the emerging external sector developments leading to higher CAD and rupee depreciation.     (The government) has taken a slew of initiatives to boost exports and reduce imports, encourage capital flows to facilitate financing of CAD and stem the volatility in the exchange rate of the rupee

GOVERNMENT POLICIES

Proposal to increase Foreign Direct Investment (FDI) cap in sectors like telecom, retail and defence.

Liberalizing FDI rules will help attract foreign investment into the country, which is badly needed at a time when the rupee is the worst performing currency in Asia.

Measures taken by the government to support the rupee includes

•raising the rate of interest subvention from 2 to 3 % that will benefit exporters and small and medium enterprises

•hike in import duty on gold

•liberalisation of FDI, etc.

1. Government should increase the limit of FDI in the existing sectors as well as encouraging in other sectors such as aviation, retail, telecommunication, radio & broadcasting etc.

2. Government should create a stable political and economic environment in order to make India an attractive destination for foreign investments.

3. Government should raise import duty on gold in order to decrease the domestic demand for gold import.

4. Government and both RBI should take measures to bring down high inflation rates.

MEASURES THAT SHOULD BE TAKEN BY RBI AND GOVERNMENT:-

1. Government should steps boost export-intensive sectors and develop import-substituting industries in order to make India less dependent on imports.

2. RBI should sell Forex reserves and buy rupees in an immediate action in order to arrest the further decline in the value of rupees.

3. RBI should hike the interest rates in order to reduce the money supply in the economy.

•To attract investments, RBI can ease capital controls by increasing the FII limit on investment in government and corporate debt instruments

•Government can create a stable political and economic environment.

•However, a lot depends on the Global economic outlook and the future of Eurozone which will determine the future of INR. 

SUGGESTIONS

•All said and done but it may be argued that if policy makers attempt to arrest the further depreciation of rupees, then the over-all economic growth will take a back seat.• •Hence, we can say that the policy makers are facing a real challenge of arresting the fall in the value of rupee as well as reviving the already slow economic growth.

• The future of the Indian economy now depends on how our policy makers deal with the current global economic situations.

Thank you!