EXECUTIVE SUMMARY
More
or less, now everybody must have familiar and acknowledged about current
currency war (between INR & Dollar) in India, which is reaching at a new
heights day by day and recorded a new history of weaken Indian economy. The
question is how to overwhelm this paralyzes depreciation from this currency war
which set all challenges to our Central Bank (RBI), Economist & Policy
Makers in Macro level. Since from the Independence (1947) the Dollar Exchange
rate have started depreciating from $ 1 =
Rs.1 (1947) to Rs.69 (2013) (http://en.wikipedia.org/wiki/History_of_the_rupee)
and deteriorate
our rupees strength gradually. Govt. of India has been exercising its entire
weapon to freeze the rupees fluctuation and to maintain sustain economy by any
mean. Govt. has restricted Gold Import from International Market and direct
Banks to stop approve loan against gold, but all those efforts has gone in
vain. Our Central Bank (RBI) is recommending for new thinking to stable the
situation but the efforts is still unquenchable to determine the problem.
Despite of restriction on Gold, Investors continuing purchase of precious
yellow metal by thinking of safe investment & profitable tool for their
future which has set a new historical price benchmark Rs.35000 / 10 gm. till
now.
RUPEE TIME LINES
Year 1966: In the time of Mrs. Indira Gandhi was Prime Minister, Inflation was
skyrocketing as tremendous rate and also to keep on the aids given by USA to
India, USA demanded and pressurized PM to devalued INR against US$. Despite of
opposed the policy Mr. PM interested in getting help from USA by devalued INR
vs. US$.
Year 1970: Due to Incompetence of Indian Politicians and bully of USA in the year
1970 the US$ grew stronger than INR. The exchange rate in 1970 was 1US$ = 7.47
INR which was further incline to 1US$ = 8.40 INR in 1975, after assassination
of Indira Gandhi in the year 1984, and due to Boffors Scam stumbling Rajiv
Gandhi’s Govt. made the INR weaker with valued 1US$ = 12.36 INR in the year
1985, and by the end of 1990 the exchange rate stood up to 17.50 INR.
Year 1991: India got drastic economic drop in
the year 1991 under Mr. Narashima Rao Government, Indian Forex reserve dropped
to its bottom level due to currency overvaluation and current account deficit
(CAD). The crisis occurred due to large growing fiscal imbalances and started
Balance of Payment (BoP) problem in the mid eighty. Participating in Golf war,
India Oil import bill swelled, export dropped, credit raised up and investors
took their money out tends India serious economics trouble. To filled the gap,
India borrowed huge amount from International Monetary Fund (IMF) with a
condition that INR will be devalued against US$ and became 24.58 INR from INR
16.31 / 1 US$.
Post Year
1991: India goes
through several reforms after years 1991 under Narashima Rao govt. in the form
of Liberalization, Globalization and Privatization. India government opens its
door for Foreign Institutional Investors (FII) and Foreign Direct Investment
(FDI) to boost and empower Indian Economy first time. The reform policy has given
satisfactory results so far and keeps India’s position 9th largest ($1.824
trillion) by Nominal Gross Domestic Product (GDP) and 3rd largest ($4.684 trillion) by Purchasing Power
Party (PPP) in the world. Mr. A B
Vajpayee-led government adds some zing antic reform on nation infrastructure
project (Golden Quadrilateral) for economic growth and per capita
income. India enjoyed high growth rates for a period from 2003-2007 with growth
averaging rate @ 9%. India’s raising economy was predicted as a superpower
nation by the end of 21st century. The INR value started appreciate
in the year 2007 to INR 39.42 / 1 US$ due to heavy inflow of foreign funds to
Indian Stock market but the growth then moderate due to global financial crisis
(Recession & Sub-prime Mortgage crisis) and Indian rupees value goes down to
48.88 / 1 US$ by 2008.
Year 2012: Beginning
of the year 2012, India entered a period of more pathetic growth with
growth rate slowing down by 4.4 %. Other economic problems rampant and plunging
Indian Rupees by high current account deficit and slow Industrial growth.
Foreign investors started pulling out money from India and INR reaches 57.15 /
1 US$ by June 2012. Since then, Indian Rupees inclining its life time high as
68.83 / 1 US$ as on August 2013, which become a challenging task for Indian
Economist.
HISTORICAL GRAPH (INR / US$)
INR Value against 1 USD
MAJOR FACTORS INFLUENCE FOR CURRENCY FLUCTUATION:
There is several factors influence for Currency fluctuation. It’s all about demands and supply, whenever the currency demands is higher than its supply the values got appreciate and just reverse on other sides called depreciation. India is dominated by Foreign Investors; FII captured more than 70% of Investment in Indian Stock Market whereas Domestic Institutional Investors (DII) holds less than 30% Investment. So ultimately the controls is regulated by FII which influence Indian currency fluctuation, when Indian economy did well and simultaneously stock market performed well these overseas investors started investing comprehensively by converting global currency in to INR which puss rupees value up / stronger, however in adverse while pulling out investment they sold INR by converting in to US$ and the rupees values depreciated. Dollar is counted as global currency and most of the country trade using dollar as trade reserve currency. The value of currency fluctuated in real time basis, when India imports, it is required to pay importing country currency by converting INR through exchange. Currencies are likely to change almost constantly on financial market, generally by banks around the world.
Ø
Inflation
Higher Inflation rate depreciate rupees value, as the purchasing power of
party (PPP) deviate relatively to other countries and in reverse, lower
Inflation rate exhibits a rising currency value. Inflation is directly
proportional to the national expenditure by import from other countries via US
dollar. It became a gift to Indian economy after globalization which is unavoidable
now a day, as we all are founded with foreign products. Any spike on price
attracts huge impact on rupees valuation.
Ø
Current
Account Deficit
Current Account Deficit (CAD) represents the status of trade of the country with other trading
partners (global). India is net importer to the world; hence nation imports
many essential goods and commodities to meet the needs of domestic consumption
thus leading to high expenditure whereas our export does not balance with
import. Therefore equal amount of foreign inflow is not coming to country,
which devaluate the rupees value.
Ø
Interest
Rate
Interest rate has a close relation with currency
fluctuation. A higher interest rate also offers higher returns compare to other
countries which attract both domestic and foreign investors and appreciate
Indian rupees value. Lower interest rate depreciate currency value is
vice-versa.
The currency value would not be affected only based on the interest; it
is impacted based on the other condition like Inflation or, Economic situation.
RBI adjusts its CRR and Repo Rate regularly to combat the currency situation
which implicates EMI and Interest Rate.
Ø
Foreign
Institutional Investors
Being an emerging economy in the world, India
attracts foreign investments. Basically Foreign Institutional Investors (FII)
are lure about growing Indian economy in short term basic and invest their
money in Indian Stock Market to get optimum benefits. Due to difficult economic
situation, if investors feel their investment option is not safe or, more
attractive elsewhere, there will be outflow of capital from the economy as FII
exit their investments in India leading to more dollar demand and depreciation
of rupees. If currency appreciated due to inflow of FII investments, than opposite
will occur while outflow of capital takes place. So it is better to have
Foreign Direct Investment (FDI) in long term investment basis rather than FII
in short term.
(Year wise net Sales/Purchase activity by FII & DII
in Indian Stock Market since 2006 to August’13)
Ø
Imports
As India is 2nd largest country in the
world by population and geographical area, it is required to import voluminous
goods and services across the global market to meet the domestic requirement.
Until 1991, the liberalization begun India was isolated from world market to
protect its economy and achieve its self-reliance. Since liberalization, the
value of India’s international trade increase sharply, with the contribution of
goods & services to country GDP 16% in 1990-91 and 47% in 2008-10. India
accounts for 1.44% of export & 2.12% of Imports for merchandise trade
worldwide. The major commodities import by India is crude oil and petroleum
products by $56 billion, Gold, Silver by $47 billion and other major products
such Machinery, Electronics goods etc. accounts India’s trade deficit and
redirected towards rupees devaluation severely.
Ø Subsidy Overburden
Since from the Independence, Govt. of India
subsidized many Industries and products starting from Petroleum product to Food
Items. India’s massive subsidy policy has been criticized by World Bank as
allegedly increasing economic inefficiency. On the other hand India is lowest
public expenditure on Higher Education, Health and Infrastructure like
essential sectors. Public Tax moneys are utilized through Interest Subsidy,
cash transfer, PDS and Agriculture & fishery subsidy etc. which creates
overburden to govt. fiscal deficit. These deficit increases external debts
ratio at IMF, World Bank and other country liabilities and put pressure at
Indian rupees towards downfall.
Ø
Political
Instabilities & Corruption
Good governance brings good reforms, Like India have
multi party ruling government brings multi propaganda and instabilities. It is
very difficult to decide any proposal & reforms unanimously in the cabinet.
Many times central & state ruling political party brings different
unnecessary social subsidy programme to attract public vote in the vote bank
politics system creates external debt burden to the government. Corruption is
the biggest problem in India, a series of Scam and Glottal have been seen from
the ruling government since last few years (Bofors, MGNAREGA, 2G Spectrums, Highway
Scam, Coalgate, Vodafone Tax Scam, Mining scam etc.) creates huge loss to
nation economy. The money has been converted in to Black money and keeps in
different country’s bank accounts. In February 2012, the director of Central
Bureau of Investigation (CBI) said that Indians have $500 billion
of illegal funds in foreign tax heavens.
IMPACT & IMPLICATION
IMPACTS:
Ø
Gold & US$ Investment: Global uncertainty and
various economy crisis like Recession, Sub-prime Mortgage crisis, European Debt
problem etc. leads to search for a safe haven in Gold and US$ among the investors and pulling out
their investment from India results rupees crisis.
Ø Oil
Imports: Devalued
rupees impact severely in Oil import from GULF and other countries. As India is
4th largest (3060000 bbl/day) Oil importer country in the
world and import cost is the major factor influencing rupees depreciation.
Ø
Inflation: The inflation will definitely
goes up, if the essential commodities like Crude Oil, Machinery, electronics
goods and essential food products price will hike.
Ø
Foreign Trips: Domestic traveler may shack
while foreign holiday due to rupees downfall however foreign visitors will
benefited from their leisure at India and the visiting rate can be increased
due to rupees setback.
Ø
Education Abroad / Loans: The dream of Indian students
studding at abroad will hit definitely due to rupees fall against US$. Students
have to pay more money in terms of fees and expenses and they have to go for
extra loan from bank. Higher education at abroad will definitely set challenge
to merits which is a long term problem to India’s growth.
IMPLICATIONS:
1. Government should restrict some
Imports like gold, precious metals, petroleum products, luxuries items etc.
2. Both central & state government
should stop unnecessary subsidy programme (Food Security Bill, Assistance to
sick Industries, Oil subsidy etc.) and save external debt and public money.
3. Foreign official trips of minister
& official should check and official expenses should reduce to restrict the
debt liability.
4. Government should emphasis more on
research & development of renewable resources like Wind, Solar, Bio-diesel
to reduce oil import bill.
5.
Black Money should return back from
different banks across the globe.
6.
Gold ETF and currency trading
should restrict with certain limitations.
7.
Restriction on FII at Indian Stock
market should imposed with time limitation.
8. Central & State govt. should
ponder unanimously about their policy to get control on the worst economic
situation.
9.
Exports should encourage with duty
cutoff privilege and simultaneously industrial growth should take in to
consideration.
10.
All financial legal cases pending
in different court should finalize within time frame & Apex court should
monitor and take course of action it.
1.
Every Individual should save their investment
/ money in Indian bank and should pay tax honestly in time.
2. People should give up buying gold and silver in retail to save US dollar.
3. Unnecessary vehicle uses should stop to save import cost on crude oil and
should use public transportation / car pulling while journey.
4. Luxurious items should stop buying,
especially which are importing from cross boarder (Like Electronics Gadgets,
Mobile, IPod, Sports Bike, Car, Cosmetic Items, Food & Beverage etc.) by
paying US dollar.
CONCLUSION
Currency fluctuation is not one day or, short term issue which can be solve within a fortnight by doing any magic. We all have to contribute / give up a little towards making our economy strong and significant. So by give up some shot of things can alter the situation and give a big result to our rupee depreciation and India will be a superpower one day, there is no doubt on it.
References:
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E-Mail : - panchugopal.seet@gmail.com
