Indian Rupee Slained – An Investigation

 [Dear Readers,  I publish here a little different stuff than my usual. Definitely, I will continue other stories which I have not completed so far. But, as of now, I present this. Hope you enjoy. I would love to have a discussion too over this article. Happy reading !]

In 2006, when I was in United states for my summer internship, every day I would wish, ‘May the exchange rate (rupees per dollar) increase!’ Of course, I was earning in dollars, therefore like a self centred moron, I wanted to get more rupees after coming back to India. That time I never cared about Indian economy and exchange rate never increased, now I care, so exchange rate never stops increasing.

If I just take a look at the rupees' performance against dollar starting from the year when I was in US i.e. 2006, statistics tells that it started from 45 INR / USD in 2006, kept going down to 39 INR/USD in 2008 and then picked it up from here to reach 50 INR/USD in 2009. Though it further started declining in 2010 and returned back to 45 INR/USD in early 2011 thus relieving Indian economists a bit but pretty soon it again started building up since then and as we know rupee reached its all time low, 56.40 INR/USD in recent days. This means now we have to spend 56.40 INR to buy one dollar while it was 45 INR to buy one dollar in 2006. Clearly, rupee has lost its value against the dollar or in other words, rupee has depreciated.

So, why did Indian currency depreciate against dollar? This was my first question to myself. I began my investigation. The very basic principle of economics operates here too which says ‘If the demand of something is higher than supply its value appreciates and vice versa’. So, if the demand of a particular currency decreases, its value depreciates. 

Now my objective was narrowed down to figure out the factors causing increase in demand of dollars vis-a-vis factors causing decrease in demand of Indian rupee.

So, here I present the major culprits:

•  Affection for Dollar – The first thing I discovered was that the dollar is the most accepted currency. Why is that? Derivative instruments are available in plenty to hedge the dollar exchange rates hence it is considered to be the best currency to do business. Most of the people consider dollar as the safest currency and this sentiment reflects the exceptional liquidity of markets in dollars. Hence, any negative movement in the market lead people to accumulate dollars. Due to the crisis in Europe, large banks and financial institutions started selling euro and bought dollars thus making dollar stronger against other currencies. Amidst the uncertainty in global market, demand of dollar has gone up. If we go little more deep, we’ll find out that the extraordinary stability in US treasury securities has developed a faith in dollar to a certain extent.

It may interest you to know that Warren Buffet too likes dollar than most of the other currencies.

•  Current Account Deficit in India - When the total import of a country exceeds its exports, the phenomenon is termed as current account deficit and the country is like a debtor to rest of the world. India is in a state of current account deficit. Now when the import of the country is higher then to maintain the equilibrium, the currency of the country has to depreciate.

If export is more then the buyers will demand for more Indian Rupee to purchase these export goods leading to appreciation of Indian rupee but current situation is just reverse.

• Economic Slowdown – When a foreign investor invests in India, he has to purchase Indian rupee to make investment in a particular market segment which again leads to higher demand for rupee and hence its appreciation. FIIs (Foreign Institutional Investors) have made considerable investment in Indian stock markets. But currently, influential world (mainly Europe) is facing recession, so they are pulling their investments out from India which again causes Indian currency depreciation.

It further leads to a vicious circle. If currency depreciates, FIIs may end up making losses in the stock market and hence it will act as a deterrent for FIIs to invest more in Indian market which in turn will cause further rupee depreciation.

           

• Indian Policy – Economic policy of India also plays an important role. Policy should encourage more FDI (Foreign Direct Investment) which is not the case in India. Though government apparently tried to do something and announced FDI in retail but had to hold back amidst huge pressure from both opposition and allies.

Apart from these, there are some other reasons too such as corruption, pro-longed inflation, scams, rising oil prices etc., though as a matter of fact, they are interrelated too.

Major Impact

• Rise in fiscal deficit. Fiscal deficit is a situation which arises when government's total expenditures exceed the revenue that it generates. 
• Rupee depreciation will cause all imported products to be more expensive for us.  Oil which is imported has already increased its price. Due to the increase in oil prices, transportation cost of goods will increase and that will be charged from the consumers only.

•  Companies with foreign debt will be heavily impacted as they will have to repay their loans in dollar.

• Travelling and studying overseas will become more expensive.

• It is good news for Indian exporters such as IT sectors as they will earn more.