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The Rising Rupee

Group 14: Jaimin,

Kshitij, Ashutosh & Rajat


Contents

1

The Rupee’s rise and it’s impact

2

Why the Rupee needs to appreciate further ?

3

Why the Rupee needs to weaken ?

4

Conclusion

The Rising Rupee


The possible reasons Inflation

Increase in PPP

Interest Rates

Higher return relative to other countries

Increase in foreign inflows

Country spending more on foreign trade than it is earning

Borrows capital from foreign sources to cover deficit

Current Account Deficits Market forces behind Exchange Rates, e

Public Debt

Terms of Trade

Political stability & economic performance

Country becomes less attractive to foreign investors

Greater demand for a country’s exports & increasing revenues from exports Capital inflows into the country

e strengthens

Country’s debt rating reduces

e strengthens

Excess demand for foreign currency

e weakens

e weakens

e strengthens

e strengthens

The Rising Rupee


Is history for or against it?

Dutch Disease

Dutch Disease

• The appreciation of the local currency in a sudden spurge • Past instances in countries like Columbia ?

• Is India a victim ?

The Rising Rupee


The Impact

The Rising Rupee


What actually happened! FY06: Economic growth spurted to 9%

Supply shortages + Excess Demand

RBI hikes interest rate

RBI intervenes (absorbs dollars)

Capital inflows surge (FIIs, FDIs, ECBs, Remittances)

Firms turn abroad to borrow funds

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of US meltdown

The Rising Rupee


Capital Inflows • $16 billion in 2006 – 07 • Banking, Telecom, Insurance, Retail, Airlines

• $32 billion over last 4 years • $4.6 billion in first 5 months of 2007

• $12.1 billion in first half of 2006 • Financing of acquisitions at home & abroad

FIIs

FDIs

ECBs

NRIs • $3.8 billion last year • Remittances @ $19.6 billion in first half of 2006 The Rising Rupee


What actually happened! FY06: Economic growth spurted to 9%

Supply shortages + Excess Demand

RBI hikes interest rate

RBI intervenes (absorbs dollars)

Capital inflows surge (FIIs, FDIs, ECBs, Remittances)

Firms turn abroad to borrow funds

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of US meltdown

The Rising Rupee


RBI’s dilemma

Supply of Currency

Demand for currency

Market Volatility

Exchange Rate

Money supply / inflation gets affected

RBI intervenes in FOREX markets

Volatility in Market

The Rising Rupee


What actually happened! FY06: Economic growth spurted to 9%

Supply shortages + Excess Demand

RBI hikes interest rate

RBI intervenes (absorbs dollars)

Capital inflows surge (FIIs, FDIs, ECBs, Remittances)

Firms turn abroad to borrow funds

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of US meltdown

The Rising Rupee


The Impossible Trinity

The Rising Rupee


The Impact

The Rising Rupee


Is history for or against it?

Earlier Devaluations

• 1966  1983 (7.8) 2002 (49) • Rate of growth of exports < Rate of growth of imports

• Japanese exporters cut export prices • Shifted domestic production to high value The Appreciating items (Lexus of Toyota & Infiniti of Nissan) Yen (1990s) • Shifted foreign production to commodity – type products

The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued

Rupee appreciation needs to be allowed to control inflation

Reduced Production Cost Inflation and USD/INR

Trade Deficit

52

Government External Debt

2.00%

51

Inflation (Base Year: 1993 - 94)

50

USD/INR

1.60%

Reduced Foreign Debts

Cheaper Imported Goods

USD/INR

47

Foreign Acquisition

1.20%

2 per. Mov. Avg. (Inflation (Base Year: 1993 - 94))

48

0.80% 46 45 0.40% 44 43

Import based foreign investments

Inflation (MoM basis)

49

0.00%

42 41

-0.40%

40

Aug-07

Jun-07

Apr-07

Feb-07

Dec-06

Oct-06

Aug-06

Jun-06

Apr-06

Feb-06

Dec-05

Oct-05

Aug-05

-0.80%

Jun-05

Rupee denominated

39

Apr-05

Sterilization

International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued

On a REER basis, the Indian rupee is estimated to have depreciated to around 99 in 2006 â&#x20AC;&#x201C; 07 down from its peak of 102 in July 2005

Reduced Production Cost

Trade Deficit

REER Base Year: 1993 - 94 103

Government External Debt 102

Reduced Foreign Debts

REER

Foreign Acquisition

101 100 99

Cheaper Imported Goods 98

Import based foreign investments Sterilization

97 96 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Rupee denominated International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation

Reduced prices of imported raw material like oil & steel

Rupee is no longer overvalued

Hence, reduced cost of production

Reduced Production Cost

India (Imports) 250000

Trade Deficit

Others

Government External Debt

200000

Capital

Cheaper Imported Goods

Import based foreign investments

Imports in $ million

Reduced Foreign Debts

Foreign Acquisition

Iron and Steel

150000

Gold Silver and Pearls

Petroleum Crude and Products 100000

50000

Sterilization 0

Rupee denominated

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued

A stronger rupee would ensure that the trade deficit is kept in check despite rising oil prices

Reduced Production Cost

Trade Deficit Government External Debt Reduced Foreign Debts

Foreign Acquisition Cheaper Imported Goods

Import based foreign investments Sterilization Rupee denominated International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued

A 10% rise in the rupee, causes an equivalent decrease in Indiaâ&#x20AC;&#x2122;s external debt.

Reduced Production Cost

Trade Deficit

Year

External Debt of (Rs. Crore)

2005

5,39,389

2006

5,64,280

2007P

6,75,857

Government External Debt Reduced Foreign Debts

Foreign Acquisition Cheaper Imported Goods

Import based foreign investments Sterilization Rupee denominated International debt

The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued

Many large companies that have borrowed money abroad in recent years are likely to benefit from the strong rupee

Reduced Production Cost

Trade Deficit

With foreign acquisitions expected to grow in the coming years, the strengthened rupee would prove to be an added advantage

Government External Debt Reduced Foreign Debts

Foreign Acquisitions Cheaper Imported Goods

Import based foreign investments Sterilization Rupee denominated International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued Reduced Production Cost

Cheaper consumable goods • Consumer electronics • Apparels

Trade Deficit Government External Debt Reduced Foreign Debts

Foreign Acquisition Cheaper Imported Goods

Import based foreign investments Sterilization

Cheaper travel abroad • Students • Tourists

Reduced R&D expenses • Automobile • Electronic & Electrical goods

Rupee denominated International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued Reduced Production Cost

Trade Deficit Government External Debt Reduced Foreign Debts

Foreign Acquisition Cheaper Imported Goods

• Sterilization is the reduction of interest rates to curb inflation as well as maintain a relatively constant exchange rate amidst increasing capital inflows

• RBI can buy up the excess rupees by issuing bonds (MSS) or increase the CRR • However, in India’s case, further sterilization would prove to be infeasible

Import based foreign investments Sterilization Rupee denominated International debt The Rising Rupee


Why the Rupee needs to appreciate further? Addressing Inflation Rupee is no longer overvalued Reduced Production Cost

Trade Deficit Government External Debt Reduced Foreign Debts

Due to an appreciating rupee, people all over the globe, are getting attracted to this currency Under such circumstances the government, is working fast on a scheme to issue rupee denominated international debt. The proposal has been mooted by the Department of Economic Affairs, Ministry of Finance and is being discussed by policy makers at a higher level

Foreign Acquisition Cheaper Imported Goods

Import based foreign investments Sterilization Rupee denominated International debt The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves

Exports and Exporters

Foreign Exchange Reserves 50.00

45.00

The IT Imbroglio

$250.00 Exchange Rate

40.00

$200.00

35.00

30.00

$150.00

FIIs on the move

USD / INR

25.00 $100.00

10.00

$50.00

20.00 15.00

5.00 0.00

$0.00 1950-51 1952-53 1954-55 1956-57 1958-59 1960-61 1962-63 1964-65 1966-67 1968-69 1970-71 1972-73 1974-75 1976-77 1978-79 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07

Job Losses

Loss of Business The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves

Exports and Exporters

Around 30% of the share of exports to be affected More than 86% of exports in USD

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves FII Inflows and USD/INR 25000

20000

The IT Imbroglio

15000

52

FII Inflows (Rs. Crore)

Exports and Exporters

FII in Rupees Cr.

51

USD/INR

50 49 48 47

10000

FIIs on the move

5000

45 44

Jul-07

Jun-07

Apr-07

May-07

Feb-07

Mar-07

Jan-07

Dec-06

Oct-06

Nov-06

Sep-06

Aug-06

Jul-06

Jun-06

Apr-06

May-06

Feb-06

Mar-06

Jan-06

Dec-05

Oct-05

Nov-05

Sep-05

Aug-05

Jul-05

Jun-05

Apr-05

May-05

0

USD/INR

46

43 42

-5000

Job Losses

41 40

-10000

39 -15000

38

Month - on - Month

Loss of Business The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves

Exports and Exporters

â&#x20AC;˘ Textile and cotton industries â&#x20AC;˘ Exporters considering to layoff 275000 workers by year end

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business The Rising Rupee


Why the Rupee needs to depreciate? Forex Reserves

Exports and Exporters

â&#x20AC;˘ Erosion of competitiveness â&#x20AC;˘ Business shift to countries with lower value of exchange rate

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business The Rising Rupee


Steps taken by RBI !

Encouraging Higher Dollar Spend Restrictions on ECB

Continuous Intervention

Tax SOPs and Promotion

Rupee Depreciation

Raising Investment limit in overseas Ventures

The Rising Rupee


Conclusion

 The nation has seen a growth and the economy is rising

 India is attracting a large amount of capital inflows  Dealing with these inflows is difficult  Intervening to defend the exchange rate can help reserve export competitiveness, but it can endanger the inflation target (Impossible Trinity!!)

The Rising Rupee


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RBIâ&#x20AC;&#x2122;s dilemma

Supply of Currency

Demand for currency

Market Volatility

Exchange Rate

Money supply / inflation gets affected

RBI intervenes in FOREX markets

Volatility in Market

The Rising Rupee


Capital Inflows • $16 billion in 2006 – 07 • Banking, Telecom, Insurance, Retail, Airlines

• $32 billion over last 4 years • $4.6 billion in first 5 months of 2007

• $12.1 billion in first half of 2006 • Financing of acquisitions at home & abroad

FIIs

FDIs

ECBs

NRIs • $3.8 billion last year • Remittances @ $19.6 billion in first half of 2006 The Rising Rupee


The Impossible Trinity

The Rising Rupee


Rupee Appreciation