The year 2012 has begun with catastrophic affect for the rupee. It
was Rupees 43.96 against a dollar in the July 2011 and now for $1 it
is Rupees 54.3. Rupee hits all time low in January 2012. This kind
of decline will have the sweeping impact on the macro economy of the
country, as we are heavily dependent on the import of oil, food
items and other crucial raw materials.
Devaluation means officially lowering the value of currency in terms
of foreign currencies. There could be many motives of the
devaluation. It stimulates exports of commodities. It restricts
import demand for goods and services. It helps in creating a
favourable balance of payments. Almost all the countries of the
world have devalued their currencies at one time or the other with a
view to achieving certain economic objectives. During the great
depression of 1930 devaluation was carried by most countries of the
world for the correcting their over-valuation.
Valuation History of Indian Rupee:
In early controlled exchange rate regime, the rupee exchange rate
hovered around Rs 4.00 in the 1950s, Rs 5.00 in the 60s, Rs 7.00 in
the 70s, and Rs 8.00 in the 80s. In the liberalised era of 90s, the
rupee moved to Rs 20s and Rs 40 in the next decade of 2000.
During this period, the Government has declared two major
devaluations. The rupee was devalued first in 1966 by 57% from Rs
4.76 to Rs 7.50 against the US dollar. In the 90s, the rupee was
again devalued by 19.5% from Rs 20.5 to Rs 24.5 against the US
1966 - Devaluation:
Since 1951, despite government attempts to obtain a positive trade
balance, India experienced a severe balance of payments deficits.
Inflation caused Indian prices to go sky high. When the exchange
rate is fixed and a country experiences high inflation relative to
other countries, that country’s goods become more expensive and
foreign goods become cheaper. Therefore, inflation tends to increase
imports and decrease exports. Since 1950, Indian continuously faced
trade deficits. Another reason, which played important role in the
1966 devaluation was war with Pakistan. The US and other countries
withdrew their aid, which further necessitated devaluation. To
improve fiscal position, Government of India devalued Rupee by
whopping 57% against Dollar.
1991 - Devaluation:
In 1991, India still had a fixed exchange rate system, where the
rupee was hooked to basket of currencies of major trading partner
countries. At the end of 1990, the Government of India found itself
in serious economic trouble. The government was close to financial
default and its foreign exchange reserves had dried up to the point
that India could barely finance three weeks of imports. In July of
1991 the Indian government devalued the rupee by 19.5%. The
government also changed its trade policy from its highly restrictive
form to a system which allowed exporters to import 30% of the value
of their exports.
Chronology of India’s Rupee Valuations
2010 (January )
Impact of Inflation on Currency:
Inflation rates in India have risen about 8.50% amid concerns
surrounding the devaluation of the rupee and the erosion of the
purchasing power of savings. In spite of Governmental
interventions, the rupee is in a free-fall, having slipped by over
20%, making it one of the most awful performing currency globally.
RBI made thirteen rate increases attempts to docile the inflation in
last one year but hardly achieved any significant result. Inflation
rate maintained upwards trend. This is now reflected through the
currency depreciation. Inflation directly enhances prices and
thereby affects the purchasing power of currency. Currency value and
inflation have a direct co- relation and impact each other. The
currency re-valuation is also essential with the change in domestic
prices affected by inflationary forces. Currency is considered to be
over valued if the suitable adjustment is not made with the price
Impact on Gold:
India currency devaluation has also resulted in surge of import by
over 200% of gold and silver. Statistics show that imports of gold
and silver to India were $8.96 billion a growth of 222%. The
Reserve Bank of India purchased 200 tonnes of gold from the
International Monetary Fund in 2009. From the start of 2011, some 30
banks in India have been granted permission to import gold and
silver. Further gold purchases are expected in coming months, as the
Reserve Bank has issued licenses to seven more banks to import gold
and silver. Indian banks are therefore contributing to the massive
increase in demand for gold and silver. Chinese banks are also
catering to the increased demand of Chinese people for gold bullion
for investment and savings purposes. In fact, most of the world’s
central banks are now diversifying from major currencies such as the
dollar and euro into gold. In addition to India and China, these
countries include Russia, Sri Lanka, Bangladesh, Mauritius, Mexico,
Iran and Saudi Arabia. Financial experts believe, the increased
demand for gold and silver from India and wider Asia is sustainable
and that it will keep the precious metal market thriving.
Impact on Stock Market:
As a result of de- valuation, Indian stock markets will face new
threats. The operators and participants were earlier concerned about
domestic inflation rate and the Reserve Bank of India’s economic
policies. But the fall in the value of Indian currency has taken
aback all concerned. The investors are bound to suffer as there is
always a positive correlation between stock index and corporate
Reason for Devaluation:
1. Inflation: Firstly, the descend, in the rupee was assumed to have
taken place to adjust for the high inflation. But, as the rupee
continued to go down, apprehensions of further increase in the
inflation have appeared.
2. Strengthening of Dollars:
Increase in global dollar value can also be attributed as one of the
prime reason for the fall in the value of rupee. The demand of
dollars due to economic crisis in other countries including Europe
has also tremendously increased the dollar demand. The Euro-Zone
crisis has weakened the Euro significantly against the US Dollar. In
other words dollar is getting stronger in the world markets.
Obviously the investors are considering US as safe place to invest
in. There was also an increased demand for the dollar in the
domestic currency markets due to a flight of foreign funds from the
domestic stock markets.
3. Dollar Demand from Stock
Markets: Foreign institutional investor’s withdrawal from domestic
economy is the one big reason for this depreciation. The Greece
Crisis and its rescue package made investor to re-think about their
investments. Certain political changes and civil movements are also
the factors for foreign institutional investors to become net
4. Fiscal Deficit: The growing
trade deficit and large fiscal deficit are also contributing to the
fall in the rupee valuations.
According to the Government, the reason for the current round of
rupee depreciation is related more to current grim global economic
environment. The currency of every other emerging economy (barring
China that managed its currency peg against the US dollar) is
falling. The currencies of Russia, Brazil, South Korea, and
Indonesia have plunged by between 6% to 16%. So the 10% fall in the
value of rupee against the US dollar is hardly out of context. The
sovereign debt woes of European Union are shifting foreign investors
from euro assets to dollar assets. There seems to be no other
alternative to US dollar.
RBI is concerned and keeping close watch on the situation. Apart
from direct intervention in the currency markets, RBI has taken many
other measures such as relaxing external commercial borrowing norms
by raising the ceiling on interest rates. It has also increased the
interest rate cap on foreign currency deposits. The RBI has removed
the USD 100 million cap on net foreign exchange supply arising out
of rupee swap transactions that banks undertake on behalf of
customers. In order to attract more foreign currency deposits, the
RBI has raised the interest rate ceiling. The spreads for NRE term
deposits were increased from 1.75% to 2.75% while those on FCNR (B)
deposits were increased from 1% to 1.25 %.
The wide-ranging perception in the financial market is that until
the global macroeconomic environment settles, the rupee will
continue to be under pressure. "India's external position has become
increasingly vulnerable to global risk appetite. Further weakness
cannot be ruled out," Royal Bank of Scotland said in a research
note. The rupee is down 14.80% on the year, with the closest loser
among other Asian units being the Thai baht, which has shed just
3.2%, followed by the Malaysian ringgit that is down 3%.
The rupee's slither may
continue due to the decline in foreign exchange inflows and swelling
outflows. The Euro zone, the world's largest trading block and
India's biggest trading partner, is also in a deep crisis. In times
to come, this zone has to stabilise to bring some semblance of order
to the global currency markets. Numbers of Indian scams have also
distracted government’s concentration away from economy. These scams
make the bad image of India in the global market.
At the end of G-20 summit in
Seoul recently, world leaders declared (in the backdrop of the US
demanding that Chinese currency Yuan should be appreciated to check
the Asian giant from taking advantage in international trade) “We
will move towards more market determined exchange rate system and
enhance exchange rate flexibility to reflect underlying economic
fundamentals and refrain from competitive devaluation of currencies.
Advanced economies including those with reserve currencies will be
vigilant against excess volatility and disorderly movement in
Attending a meet in Seoul PM,
Dr. Manmohan Singh agreed to refrain from "competitive devaluation"
and bring in exchange rate flexibility to ensure that no country
gets undue advantage.
What Indian Government Can do, to Bring back Positive Vibrations in
1. Allow free flow of foreign investment for the development of
infrastructure and manufacturing sector.
2. Restrain / discourage import of non essential and luxury items
e.g. auto sector imports.
3. Interest rates may be increased further on NRE and FCNR accounts.
4. Restrain /discourage export of agricultural produce and basic
minerals e.g. iron ore.
5. Promote aggressively exports of manufactured goods like China
6. Promote migration of skilled personnel / work force from India.
We have them in plenty.
7. Facilitate the voluntary return of the funds parked outside
8. Reduce / cut unnecessarily expenditure of government institutions
e.g. Indian Embassies. Ask them to repatriate their surplus fund
instead of calling funds from India. Many foreign embassies in India
are remitting their surplus to their home countries.
9. Government should observe restraint in offering financial aid to
other countries. We are yet not so rich. Our people are still hungry
and need night shelters.
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