A Brief Discussionon

Falling interest rate and Weakening of rupee

UTTAM KUMAR 14BM60071

RANJEET KUMAR 14BM60080

MANISH KUMAR GUPTA 14BM60068

BHARAT GEHLOT 14BM60070

Agenda

• Current Scenario

• Reasons for weakening of Indian rupee

• Reasons for variation in interest rate

• Implication of weak rupee

• Implication of falling interest rate

Current Scenario

Current Exchange rate: 1US Dollar = 62.32 INR

Repo rates: 7.5% (changed on 04/03/15)

Consumer Price Index for inflation: 7.24%

Wholesale Price Index: -2.06%

Current account deficit narrows to 1.6% of GDP in Q3 due to sudden surge in the IT services export.

GDP growth rate for current fiscal: 7.5%

Sources: Economic Times, Business Standard, RBI

Weakening Rupee

Reasons

Huge Trade Deficit• Trade deficit is one of the major

reason for the falling rupee value.

• It could be explained like importing much more items into a geographical boundary than exporting items out of it.

• In India since in the recent times no other sector apart from IT has shown significant improvement in export level, the demand of rupee as compared to other international currencies have reduces.

• Hence rupee has to face considerable amount of depreciation against

dollar and other currencies.

Lower Capital Inflows• Not so competitive environment to

do business and myriads of cancelled projects are some of the major reasons why there is dearth of direct foreign investments in India.

• India’s ranking in ease of doing business is 142 out of 189 countries according to world bank

• This diminishes the chances of India in getting capital inflows and foreign currencies to meet our domestic need and disturbs the balance between rupee and other currencies of the world.

• Hopefully make in India may cater to this issue and make India a better place to invest. As a result rupee may regain its value again.

Higher CAD

Biggest Impact is on the Indian Rupee• If rupee falls, it could increase the inflation in the

economy

CAD touched a record high of $ 32.6bn or 6.7% of gross domestic product in December 2012

Devaluation Pressure

In 1990 1 Indian Rupee = $0.06In 2015 1 Indian Rupee = $0.016

Effects of devaluation in the Indian Rupee:• It means that Indian exports become cheaper, • But imports are more expensive for Indians to buy.

• Situation where more people are tend to sell rupees to buy dollars (or any other foreign currency that they require)

• Importers demands dollars to fulfil their needs to buy goods abroad.

• Exporters keep their foreign earnings abroad as they expect the rupee to fall further.

• This demand-supply gap between the dollar and the rupee leads to devaluation.

Low Growth and Inflation

• Declining growth results depression in expected growth in coming quarters.

• The rate of inflation may rise this year to double digits if the government is unable to curb its fiscal deficit.

• Rising inflation due to high food and fuel prices also brings down the expectation of investor.

• In this scenario, most foreigners as well as Indians tend to take money abroad, or keep it away from India.

• Global investors are also nervous about investing abroad in nations such as India due to the economic crisis in their respective countries.

• That has added further selling pressure on the rupee.

Rupee Speculation

• The Reserve Bank of India's bid to sell dollars in the open market to restrict the rupee slide has failed in the past few weeks and months.

• This has complicated the situation further.

• Once currency traders and speculators realize that India's central bank is unable to manage its exchange rate, and reduce the adverse impact on its currency, they may enter the market in a big way to sell the rupee.

• As a result, the rupee may devalue more than it should.

Falling interest rate

Reasons

Inflation rate

11 -1210-1109-1008-0907-08 -

2.00

4.00

6.00

8.00

10.00

12.00

14.00

9.88

6.00 4.88

7.25 7.25

8.90

11.70 10.90

8.30

6.40 Repo Rate (%) (annual Aver-age)3

Inflation

Last 5 year comparison of Repo rate and Inflation

Repo rate vs inflation rateRepo Rate and inflation are inversely related. That is a decease in Repo Rate leads to increase inflation. Both the economic factor are closely related to each other and Repo rate has a great influence over the inflation rate.

GDP

2006 2007 2008 2009 2010 2011 2012 -

2.00

4.00

6.00

8.00

10.00

12.00

6.28

7.25 7.75

7.25

4.88 6.00

7.90

9.20 9.00

7.40

7.40

10.40

7.20

8.20

Repo Rate (Annual Average)7

GDP6

Last 7 years comparison of Repo rate and GDP

Repo rate vs Gross Domestic productRepo Rate and GDP of a country are inversely related. That is if repo rate

decreases the GDP of an country increases. This is because of increase in money supply in economy leading to increase in demand of goods in economy. Thus resulting in increase in GDP.

Exchange rate

2008 2009 2010 2011 2012 -

2.00

4.00

6.00

8.00

10.00

36

38

40

42

44

46

48

50

7.75 7.25

4.88

6.00

7.90

40.2755000000001

46.151547.4153

45.6157

48.1317

Repo Rate (Annual Average)6

Yearly Average Ex rate5

Repo rate vs exchange rate(dollar)

Last 5 year comparison of Repo rate and Exchange rate.

Repo Rate and foreign exchange rate also share a inverse relationship between them. As increase in Repo rate leads to strengthening of domestic currency and thus leading to fall in exchange rate due to strengthening of domestic currency.

fiscal deficit

2007 2008 2009 2010 2011 2012 -

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

7.25 7.75

7.25

4.88

6.00

7.90

0.50

4.90

5.20

3.80

5.10

5.70 Repo Rate (Annual Average)

Fiscal Deficit8

Repo rate vs Fiscal deficit

Last 6 years Repo rate comparison with fiscal deficits.

Repo Rate has a positive Relationship with Fiscal Deficit. Though both are not related directly by the relationship is based on two factors which are affected by Repo rate as shown earlier in the analysis part.

Implications

Weakening Rupee

Positive:

• Export oriented industries like IT and Textile will benefit.

Negative:• Increased foreign debt• Inflation• Reduced savings• Lower investment• Risk of degradation of

credit rating• Reduction in foreign

Investment

Falling Interest rate

• EMI will decrease

• Increase in money supply in economy

• Increase in Demand of goods in economy

• Decrease in fiscal deficit of the government for the period.

THE END

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