CURRENCY DEPRECIATION : INDIAN RUPEE

Mar 3 • General • 3056 Views • 5 Comments on CURRENCY DEPRECIATION : INDIAN RUPEE

Currency Depreciation

Currency depreciation means slide in the value of currency in terms of foreign currencies.In terms of exchange it means that the foreign currency become costlier vis-à-vis the domestic currencies.For example,to understand this more clearly consider US Dollar as any other commodity placed in the market.let us assume that any point of time say august 2012 the value of Dollar reached to Rs. 55.This means value of Rupee has slide by rupees 11 vis-à-vis Dollar.

DEVALUATION VERSUS DEPRECIATION

Often there is a confusion between the two term,devaluation means official(government) lowering of the value of a country’s currency within a fixed exchange rate system,by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.In contrast,depreciation is used to describe a decrease in a currency’s value due to market forces,not government or central bank policy actions.Devaluation is the result of official government action while Depreciation or decline of exchange of one currency in terms of another is due to market forces.

DEPRECIATION OF RUPEE:CAUSES

The value of any currency in the international market is decided by the forces in market.Simply speaking,if the demand of any good or services is higher relative its supply,it becomes dearer or costly.Exactly the same holds well for inter nation currencies as well.Exchange rates are expressed as a comparison of two currencies and it is always relative.

CAUSES

INTERNATIONAL ECONOMY

The role of speculation,the under-performing international economy, Euro-zone crisis ,sovereign defaults etc. have raised profound uncertainty in international market.In such circumstances and investors feels it safe to buy dollars rather than any alternative assets.this has increased the demand of dollar in international economy and rupee along with many currencies,it is argued,suffered on account of this.

FLIGHT OF FOREIGN INVESTMENT

Foreign institutional investment (FII) are a prominent source of demand for rupee.It is well known fact that Indian stock market is dominated by overseas investors.When economy is performing well and stock market is performing better than other countries,overseas investor will become big investors here.To invest here,they require rupee.This will increase the demand for rupee and will result in higher value for Rupee.On other hand,when these investors are pulling money out of Indian stock market,Rupee will be depreciated.

CONSTRAINTS AMONG MARKET FORCES

Inelastic import bill it is said that there are invisible hands of market forces which tend to take corrective actions in case of anamoly. The same is theoretically true for an international currency that depreciates .in such cases,when currency depreciates the import become costlier while export become cheaper.

CURRENCY ACCOUNT DEFICIT

India’s current account deficit is more than the expected level,which means the country needs to buy more foreign currency to pay out bills.More demand for the foreign currency will reduce the value of country’s currency.

IMPACT OF RUPEE DEPRECIATION

 IMPORTS:It makes imports more expensive.
 EXPORTS:It makes exports more profitable.
 FOREIGN DEBTS: It increases repaying of foreign debts of Indian government.
 SERVICING:It increases burden of servicing of Indian government.

CURRENCY DEPRECIATION:INDIAN RESPECT

REASON FOR RUPEE DEPRECIATION:-

GOLD AND OIL IMPORTS

The excessive dependence of India for importing golds from African countries and oil products from OPEC countries is reducing revenue government generates from exports.Consequently,in the present economic scenario today 1 dinar is equivalent to almost 130 rupees approx.

LACK OF ENERGY RESOURCE

This is supplementary point for previous one in some regard.Too much import of household cooking gas is putting too much pressure on Indian economy as supply connection for cooking gas is rampantly increasing as the way population is.Apart from it giving subsidies to to each gas is putting too much pressure on economy.

DECREASING FISCAL DEFICIT

when the government’s total expenditure exceed the revenue that it generates excluding the money from borrowings is called the fiscal deficit.now this point is self explanatory in this regard that too much dependence on gold and oil imports,lack of energy resource and subsidies that government offers on each cooking gas is increasing the above explained point,i.e,fiscal deficit.

DECREASING BUDGET DEFICIT

A financial situation that occurs when an entity has more money going out than coming in. The term “budget deficit” is most commonly used to refer to government spending rather than business or individual spending.This is called budget deficit.

In the wake of the above three points,the value of rupee is decreasing day by day and is therefore putting severe threat over our economy.

POOR PERFORMANCE:SHARE MARKET

One of the major sources of dollar flows into India is the share market. Foreign financial investors, invest in the shares of Indian companies and mutual funds, bringing in large amounts of dollars in billions to earn comparatively at higher rates. These are held in reserve by the banks who in turn sell to Indians for meeting their dollar needs. However when the share market is not performing and indexes are falling, the foreign investors, in order to not loose further, sell their share holdings and convert the earned rupees into dollars and take these out of India for use elsewhere. In this manner, in a very short period of time, there is a large drop in the supply of dollars and its value starts going up in terms of rupees needed to buy it.

MEASURES TO STRENGTHEN RUPEE

FII MEASURES

Opening of a further US $ 5 billion worth of government securities to registered foreign institutional investors.

repaying loans

Making policies easier for Indian businessman to repay their rupee loans and allowing new classes of non-resident investors to buy government bonds.

EFFECT OF THESE MEASURES

ALLOWANCE BY CENTRAL BANK

The central bank will now allow the sale of government bonds to new types of non-resident investor:sovereign wealth funds,insurance funds and central banks.

HELP TO MANUFACTURERS

Indian manufacturers and businessman can also borrow more money overseas to repay rupee loans that were taken out for capital expenditure.The limit has been raised from $30 billion to $40 billion.

ANOMALIES OF THESE STEPS

CENTRAL BANK INTERVENTION

These measures would make borrowing and investing more attractive but the central bank intervention is still low

BROADENING INVESTOR’S BASE

Broadening investor’s base will have minimum effect on a day to day basis but not meaningfully in long terms.

RESPONSE OF MARKET ANALYSTS

the measures taken by the government in the wake of monetary policies were described by market analysts as insufficient as it lack broader structural reform.

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