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Why is the Indian Rupee Depreciating?

August 29, 2013

Falling rupee against dollar

The Indian Rupee has depreciated to an all time low with respect to the US Dollar. On 28th August 2013, the Indian rupee had gone down to 68.825 against the Dollar but the situation was somewhat revived by the Reserve Bank of India that decided to open a special window for helping state owned oil companies – Indian Oil Corp Ltd., Bharat Petroleum Corp and Hindustan Petroleum Corp.

The beneficiaries will be able to buy dollars through this window till further notice is provided. These companies, together, require about 8.5 billion dollars every month to import oil and it is expected that this will help them meet the requirements. This has had an immediate effect as is evident from the fact that the INR has started at 67 against the USD at the early proceedings in the Interbank Foreign Exchange Market. The question, however, is why this is happening. There are several reasons that can be enumerated in such a scenario:

Basic law of economics

As per the rudimentary laws of economics if the demand for USD in India exceeds its supply then its worth will go up and that of the INR will come down in that respect. It may be that importers are the major entities who are in need of the dollar for making their payments. Another possibility here could be that the Foreign Institutional Investors are withdrawing their investments in the country and taking them elsewhere.

This can create a shortfall in supply of the dollar in India. In fact, of late, the FIIs have been heading to greener pastures like Singapore owing to the greater operational efficiency and lesser bureaucratic problems that have unsettled the Indian business fraternity and hampered its overall economic growth.

This situation can only be addressed by exporters who can bring in dollars in the system. If somehow the FIIs can be wooed back, then this imbalance can also be addressed to a certain extent.

Price of crude oil

The worth of crude oil has been a major bane for India since it has to bring in the majority of its requirement from outside the country. The demand for oil in India has been going up every year and this has led to the present situation. All over the world, the price of oil is given in dollars. This implies that as and when the demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a need for more dollars to pay the suppliers. This also results in a situation where the worth of the INR decreases significantly in comparison to the dollar.

Performance of dollar with respect to other currencies

The central banks across Japan and countries in the Eurozone have been bringing out a lot of money and this has meant that both Yen and Euro have lost their value. Compared to this the US Federal Reserve is giving hints that it will end the fiscal stimulus so that the dollar becomes stronger with respect to other currencies such as the Indian Rupee at least for the time being. Till now in 2013, the US dollar index has become stronger by 1.91%.

In an interview with the Economic Times, the CO-CIO of Birla SunLife Mutual Fund, Mahesh Patil has stated that the increase in worth of USD is the major reason behind the depreciation of the INR. The Federal Reserve’s decision to reduce its Quantitative Easing has also contributed to the present situation as every asset class has been affected by the decision.

Volatility in the equity market

The equity markets in India have been volatile for a certain period of time. This has put the FIIs into a dilemma as to whether they should be investing in India or not. In recent times their investments have touched an unprecedented level and so if they pull out then the inflow will go down as well.

As per a report in Business Today, the international investors in India have withdrawn to the tune of INR 44,162 crore during June 2013 and this is a record amount. This has also created a current account deficit (CAD) that is only increasing, thus contributing significantly to the depreciation of the INR.

Effects of equity market problems on investors

Now if the INR becomes weak then it will affect the investors who are putting their money in India. For the first time ever since 2012 the FIIs have been reduced to net sellers of debt based securities. The main reason behind this is the present state of the INR. The expenses incurred in hedging the unpredictable INR are reducing the yield differential that is the main area of profit for these investors.

India, in fact, is not the only emerging market where the currency has taken a hit. The situation is similar in countries like Indonesia, Brazil and Thailand. The bond markets in several countries like India are also taking a hit as the FIIs are withdrawing en masse. The exchange traded funds are also being redeemed as the global business fraternity is looking to cut down on risks.

Poor current account deficit

One of the main reasons behind the Indian government’s inability to arrest the fall of the national currency is the critical current account deficit. In the 2012-13 fiscal India’s CAD was measured at 4.8 per cent of the GDP. The government has been unable to come up with any new destinations for exporting its products and this has also hampered the growth in this sector. There are other crucial reasons here like the lack of one window for clearance purposes and procedural delays. Even areas where India has traditionally done well on this front have fared badly this time around.

Withdrawal of investors

Recently ArcelorMittal and Posco decided to pull out from their projects in India. Posco did not go ahead with a steel plant worth INR 30,000 crore that was supposed to be built in Karnataka and ArcelorMittal withdrew from setting up a steel plant in Odisha that was supposed to cost around 52,000 crore. There were lot of delays and problems related to acquiring land for the project. In fact in 2012-13 the Indian companies have spent more outside India compared to FIIs in India.

Downgrading of Indian stocks

Goldman Sachs, one of the leading banks in the world, has rated Indian stocks as being underweight. It has also asked investors to be careful given the concerns surrounding the recovery of the growth of Indian economy.

Condition of import bill

India’s import bill has been going up of late and most of this can be attributed to gold. This has also hampered India’s efforts to arrest the slide of the INR. Gold alone takes up more than 10 per cent of India’s import bill – in April 2013, 141 tons of gold were imported and it went up to 162 during May. The government took some measures that restricted gold imports to 31 tons during June but once again in the first 25 days in July the imports went up to 45 tons.

Contraction of Indian economy

The various important sectors of Indian economy such as manufacturing, mining and agriculture have seen poor growth in 2013 and this has made them less appealing propositions for the investors. During June 2013, the aggregate industrial production in India reduced by 2.2 per cent and in July 2013 the RBI predicted that in the present fiscal there would be a growth of 5.5% which was lesser than its previous prediction of 5.7%.

Future prospects of INR

In spite of all that has been said above it will be foolish to write off the INR completely and say it shall not rise from the mire. Experts are saying that the government needs to take some short and medium term steps that will help the economy get back on its feet yet again. It is only through continued efforts that the Indian government will be able to retrieve the situation. However, it will take a Herculean effort to help the INR get back to the 55 mark.

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I am from Kolkata. Like any other Bengali I love my fish, eggs and bhaat and sweets but I also feel proud to be a part of the biggest melting pot of the world - India. It is true that I need to go a long way before I finally call it a day but I have come some way and am sure will travel further. Cheers :)

Comments

Comments
Showing 93 Comments :

Very nice article…I can state this article is a great resource!!

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To tell you the truth I live in America and have never been to India but hold that country close to my heart. To better the economic situation there though, Indians need to kill the black market, stop buying imported goods specifically imported electronics (cellphones, computers, tv’s) and imported cars. One more thing Indians need to do is invest money in their own stock market and buy bonds for Indian companies. This plan, I can guarantee you will work. Only reason the Chinese Yen is not bigger than the dollar is because they like Indians import many articles of American fashion and they buy electronic goods from Japan and S. Korea when they like Indians could be buying their own goods to better their economy.

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Very nice article, when I read the article and all the comments below, some how I feel that every individual is so responsible for this down fall. My day itself starts with a Colgate, so I’m just thinking that we are so much dependent on foreign products. I have decided to stop this now or it will be never, also will try to share this info with my friends and relatives. Thanks a lot for writing such a nice article. Keep writing Samudranil!!:)

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i THINK THE ARTICLE WAS GREAT….
I AM A STUDENT OF CLASS X..and i happened to see ur article….i think its v nice.. and what i fell is that the comments below from various people and ur replies are even better….i m writing for an interschool competition…and those comments have helped me a lot…ur article too…thanks a lot…keep writing and sharing ur prodigious thoughts with us

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    Thanks Yatin. However, I am not a prodigy as you mentioned. I am just a writer who did some research and who is happy that his work has been of some utility to a student. :)

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Am naresh from proddatur ,I pursuing MBA,thanks for information, now a days more countries not depend on any country nd any company to production all most all all things but India was import the goods nd depend on some countries ,y becouse I don’t know ,nd some causes for depreciate rupee value.

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I am poor in economics but it was nice to find your article when I wanted to know the cause behind deprecation. Do you also think we are getting globalised but not using localised products? We are getting dependent more and more on other country products. Do you think if each one of us make a small change in our lifestyle it would help?

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    If we can focus more on local products then obviously it will help the economy a lot but then people prefer international products so much that it will take some time to change. I am also honored that you liked my article :)

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very nice article… very detailed n covered every aspect…. n helpful for me so thank you sir.

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hi sir..i refered your article.., in my interviews jam session…every one were intrested…in topic…thanks for your article…it helped a lot….

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my thought is,goverment should totally avoid foreign imports,

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    I am not really sure that will be a correct thing to do from the point of view of bilateral relations. The economic impact will be much greater. Actually you gave me a fantastic idea for an upcoming article. Thanks :)

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Can you give me some best sources, like the way u hv explained, for understanding economics.

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    When you are reading any economics articles on the web, you can have Investopedia in another tab. Here all the tough economic terms are explained for supposed “laymen” like us :) Keep reading and enjoying. Bless you :)

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Very nice article . Was helpful. I am a layman and I am not able to comprehend articles of economics in so called economic times et al.. but this explained in a simple way. And I can say that u hav the proper knowledge too.

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ANUPAMA.J,Assoc Prof,MBA DPT. October 1, 2013 at 10:53 am

Sir, it has been very informative. In my opinion, if government is able to come up with some investment option which can give reasonable return then investors going in foreign investment would think about diverting a portion of investment in India where we can keep up reserves to certain extent.

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    Anupama, please don’t call me Sir and thanks for the wonderful feedback :) Yes, you are right. Debt financing instruments such as bonds should be brought back. I am not really sure as to why they were scrapped.

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sir ,
but as a citizen what are all the steps we must take to bring the value of rupee to normal?? buying indian products is the only way?

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this article has given a holistic idea for a discussion
thanks a lot

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its good but in such a kind the value of demand is compare to our currency its more but its not like good task

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really its a good analysis in short it gives a brief idea about the economic status …

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thanx sir….. ur article is comprehensive n succinct …hoping many more 4rm u .. :)

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so wot abt the rise in gold??gold is also infulencin ruppee

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Can you please tell me how buying Indian products(grocery items atleast) will increase rupee value

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    See if we buy products and services that are made in India then our financial reserves will remain in the country and there will be better growth and more jobs. However, with international products our financial reserves will be diminished and our currency will be depleted in value compared to other global currencies like dollar.

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NISAR AHMAD PUKHTA September 14, 2013 at 1:33 pm

this information and Causes and effects are analysed beautifully
thank you

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At first we have to use indian products and also have to take care about to using product of other country just stop taking use less thing from other country indian government should try to new company produce the goods which were required and it will help the people by giving jobs also and already have too many raa materials every were it helps for transforts also

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    Yes, you are correct. The development of domestic industries should be a priority now. International brands, however, should not be totally disqualified. A balance needs to be struck over here.

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I think government should get on with business representatives and elaborate investment options, to ease on FII’s.
Provided information is tend to be sweet and simple, but not so elaborate.

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can you you please say how the rupee value is getting low because of buying the foreign products..
What is the impact % on rupee value if we buy Indian goods(grocerry items atleast) instead of
foreign products

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    See foreign products have to be bought in dollars and if we keep buying such products it means our dollar reserve will be exhausted. This will create a situation where the supply of dollar will be less than its demand. This, in turn, shall reduce the worth of the INR with respect to the dollar.

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It could be so but could you kindly elucidate on your point?

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one of the main reasons fr fall in Rupee is due to currency market operations

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hi, Samudranil.
kindly tell me in details that how has this sudden downfall in currency effected a comman man

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And why cannot we do export in our currency like china & Russia are doing

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    Perhaps because INR is a global currency.

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      Perhaps because INR is not a global currency.

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        As per a post WW2 conference, the USA made an arms deal with OPEC countries like Saudi Arabia and others to have oil payments to be made only in dollars. No other currency payments are permissible.

        China and Russia have a separate pact. India’s working on a similar pact with Iran right now. If it works out, it could help bring the current account deficit down..

        USA’s invasion of Afghanistan, Iran.. Prohibition sanctions on Israel, Venezuela.. All’s been for the oil.
        Basically the same reason why the USA’s after Syria right now. The so called “Chemical weapons issue.”

        Simple logic- Oil prices rise, $ value increases. Oil prices hit rock bottom, USA’s economy hyperinflates and the entire country comes down like a house of cards.

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India has sufficient coal reserves. Instead of it our country is importing coal . Why?????? It is due to our internal problems. We don`t have creamy layer in our country. They all had gone abroad because others r paying them more. Because of which we are lagging behind in technology

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Besides living in luxury and comfort do some work (service, manufacturing, agriculture) doller value come down.
Aamdani athani kharcha rupaia karne se doller to strong hoga hi.

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Thanks…. This is very informative and thrown lights on many aspect of the economy… Would you please tell me what are the steps the government and RBI can take which they didn’t take so for to reduce the downfall of the INR value..

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    As of now the government and RBI are looking at short term measures and taking US dollar loans from countries like Japan that have excellent reserves to address the imbalance :)

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In my opinion india and other countries shoud avoid in inversting U.S and they should try to produce solar vehicles and bio disel engine it only reqires today.then they also try to reduse the unwanted imports.

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    That is a bit unrealistic to expect since US Dollar is a global currency of sorts. So any global transaction you do will happen in US dollars :) However I agree with the second part of your statement.

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Prof.Satyanarayan September 7, 2013 at 1:05 am

This article is very good, informative and Causes and effects are analysed beautifully.

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There are four main reasons for this fall:

1) India’s current account deficit is increasingly becoming negative which is putting pressure on rupee value.

2) The foreign currency inflow of funds has gone down in recent times because of which there is a pressure on value of rupee. In fact there has been a net outflow of funds outside India

3) The global crisis has resulted into investors putting their money into $. This has resulted in investments being withdrawn from rupee.

4) The current political scenario and policy paralysis have erased foreign investors faith in Indian economy, which has resulted into the fall of value of currency.

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What is the effect of misuse of loan offered by IMF, World Bank, etc in devaluation of Rupee.

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By the way I am from Nepal who studied in Kolkata…..and with all of this financial swings there is a wide range is sceptism here also….I was going through the web to get hold of some valuable information and surely this forum makes a lot of sense to me……cheers….

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    Thanks @Ravi. Yes, if one of the bigger countries gets affected then it has a trickle down effect on its neighbors as well. How is the economic condition in Nepal?

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    Only our leader are living in free India not us because we can not do something to improve rupee

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very interesting…..

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Arihant.zunjurvad September 5, 2013 at 4:51 pm

Now our Indian rupee is falling against the doller and etc…
why? because of the more import activities going on in India than export activities just like petrol, desail and gold etc.
to arrest this fall, we need to make a less use of petrol, gold and so on.

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    @Arihant I presume India needs to discover oil fields and mine greater amounts of gold. This will ensure that imports shall be lesser than export and thus the balance of trade will be restored.

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      one side, we want foreign investment and other side, we should not buy foreign products.then why would they invest our country,if they donot get benefit.

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        In my humble opinion the FDI should be in areas related to infrastructure rather than consumer products such as clothes, food, accessories and so on. :)

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Nice and valuable information but was there any action from the indian govt to increase the value of the INR
Babu

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    From what I have heard Raghuram Rajan, the new RBI Governor will be taking some steps to correct the situation and make the INR a more valuable currency from an international position.

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Very nice presentation Mr. Samudranil.. Nearly 90% of the goods which we use in our daily life are foreign manufactured and how can we expect to raise the value of Indian Rupee.. I hope people has to start using our own goods and take part in increasing the value of INR.

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    My pleasure Sir :) Yes if more indigenous products were used then the condition of the economy would be far better. But I guess the common consumer has been brainwashed to such an extent that they think that only products that are well advertised offer a high level of quality. So what you are saying or, rather, asking for, may take some time to materialize. :)

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@Harish I am not sure about your propositions but yes, increasing gold import duty will definitely add some much needed revenue to the national economy.

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Bills in parliament like land acquisition, food security bill etc. may also the reason behind the depreciation in value of Indian rupee……..

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is increasing in gold import duty the right step to rise the value of Indian rupee?????

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FOR THE FIRST TIME IN THE HISTORY OF MANKIND ..”NEED” “COMFORT” AND “LUXURY” ARE SOLD AT THE “SAME PRICE” IN INDIA..!!!
ONION= 75
PETROL=75
BEER=75

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    Well Reemee petrol cannot be called a comfort anymore since it is an almost inalienable part of our lives but yes the situation is not ideal indeed!

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swarnavo mukherjee September 3, 2013 at 5:53 pm

R aaj kal nana college university te teacher ra jevabe student der dwara nigrihito hochchen, sei bishoeo likho. Ei beparta ekhuni bandho hoya uchit. R tumi porichalok Rituparno Ghosher opor ekta article lekho na keno?

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    Once again the logic is same….I am supposed to write something that has a pan-Indian appeal or let’s say context. Regarding Rituparno Ghosh, I have not really watched his films so I presume I would not be the ideal person to comment on them or evaluate him as a director. However, I shall keep your suggestion in my mind :)

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@Swarnavo I can but then I guess it shall become a little too provincial since I am not too sure that such a system is in place at other cities in India. However, I shall try and write on it as soon as I get any concrete information :)

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@Rahul I appreciate your kind comments and henceforward will keep your suggestions in mind and try to incorporate them.

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swarnavo mukherjee September 3, 2013 at 5:20 pm

When you are from kolkata Samudranilda, then you should write and discuss about the coupan system in bus. I think it is a important issue.

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It was a good analysis. The areas affecting the fall of Rupee are covered quite substantially. It gives a holistic picture.
However facts and figures are limited to period nearing April-July 2013. In my opinion, previous or average figures can give a clear picture.
Plus future possible steps to rise the rupee, could have been given.

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    Get out of INR unless you want to loose your shirt completely, people have finally realised that India is, was and still is a complete waste of time. The politicians of india haven’t a clue on how to run India, its time for India to accept its failures .

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      India is not at all a waste of time…!!! u r absolutely ryt abt d politicians but its bcoz of us that our currency is dwindling…..if u think that india is a waste of tym instead u must ruminate that citizens r too..citizens buy foreign products which give u nthng more than fancy…..buy indian products and c d the difference that it makes to our economy……BUY INDIAN PRODUCTS IF U WANT INDIA NOT TO BE A WASTE OF TIME!!!!

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        My sincere thanks to all of you for writing such thauthful articles / posts. I’m very poor in economics, however coule able to understood the reason behind Rupee depraciation. Also understood freom above posts that, we should avoid buying foreign product & incourage Indian ones. I really want to understand one thing that, one side we are inviting foreign investors to India, offering them good facilities so that they will put their plants in India. So obveously, they will start producting their brands & selling in India. Now, if we stop buying foreign product, they will discountinue production in India & will go off. Then we’ll say Investors are going back hence Rupee is depriciating. I really want to understand this statistic, Can somebody help me to clarify.

        Reply