Why is the US dollar walking down?

When it comes to the US being a consumer, it has one of the largest appetites in the world. To keep up its demand for consumption, its imports are huge when compared to exports. This created pressure since there were more payments in dollars than receipt of any other currency, which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. This resulted in the depreciation of the dollars value, which again caused more outflow of dollar for import payments. This created a state of inflation and made consumables costlier to US. To control inflation US resorted to increase in interest rates to cool down pressure on demand side of consumption. This factor along with recession in all other sectors, particularly real estate, is causing the mighty US dollar to shake. Impact of dollar fluctuations on the Indian economy Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last long because the oil price rise in the 1970s and 80s created a big gap in Indias balance of payment. Balance of payment (BOP) of any country is the balance resulting from the flow of payments/receipts between an individual country and all other countries as a result of import/exports happening between an individual country, in our case India and rest of the world. This gap widened during Iraqs attempt to take over Kuwait. Thereafter, exports also contributed to FX reserve along with Foreign Direct Investment into the Indian economy and reduced the BOP gap Indian rupee appreciation against dollar impacted heavily to the following: 1. Exporters 2. Importers 3. Foreign investors Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the worlds largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48, was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike. Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like Foreign investment of up to 51% equity limit in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special

circumstances; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. Can the Dollar remain king or not, is no longer a million dollar question, but a million Rupee question!

Home > Business & Investment > Rupee V/S. Dollar Play

Rupee V/S. Dollar Play

Monday, February 13, 2012

The rupee which witnessed a step fall through end 2011, recovered sharply from Rs. 54.5 to Rs. 49.5 in 2012 thanks to the increased FII and capital inflows. Today it is at the cross road and all eyes are on it, more so because it tends to impact every sector of the economy, directly or indirectly. The question now is: where is it headed? How will the rupee versus dollar play affect the economy through 2012? Manik K. Malakar does a ground check and forecast how the currency could behave over the year The Indian Rupee since the past month has been rising for both domestic as well as global reasons. However, the appreciation is a double edged sword. While our crude bill will certainly be assisted by the rising rupee, exports would suffer. But yes, one of the prime factors that will affect Indias rupee movements is our trade deficit and this may affect rupee appreciation. The current rally in the Indian Rupee is being driven by a number of factors that appear to be unfolding simultaneously both from the domestic front and from a substantial shift in global risk appetite, says Abheek Barua, Chief Economist, HDFC Bank. Barua was speaking about the

recent appreciation that saw the rupee reach Rs. 49.67 vis--vis the dollar in early trade on the Interbank Foreign Exchange Market on Friday. Barua notes that the initial turn of the rupee could be traced to the RBI decision to curb speculative trading in the forwards market and to de-regulate Non-resident deposit rates. This decision had two downstream effects. First speculation in the USD/INR pair was arrested and this helped the currency pair move into its natural equilibrium range. Next the deregulation of the Non-Resident deposit rates helped in increasing fund flows from that source. After announcing the measures, the RBI followed up by intervening more proactively in the FX markets so as to curb imported inflation pressures subsequently pushing the USD/INR pair lower, says Barua. So if Indias rupee appreciates who will cheer? Primarily a stronger rupee will help to meet the commitment in dollar terms on import bills comfortably, says K. Jayraman, Research Associate, Bonanza Portfolio. Remember that we import approximately 75% of our crude oil requirement and this is set to increase with GDP growth. The other primary sectors that will be affected, both positively as well as negatively by the surging rupee would be exports and imports. There is a loose relationship between the trend in the rupee and the trend in exports, says Shrikant Chouhan, Head, Technical Research, Kotak Securities. The Rupee appreciation would be a burden on exporters, but importers would benefit from an appreciating currency, as it reduces the cost of imports. However again there is a caveat. Imports could surge if the currency maintains its appreciating path at a time when the domestic industry lags on competitiveness, says Chouhan. In terms of imports, mainly crude oil, and for the equity markets too, a rupee appreciation is observed to be favourable, says Milan Bavishi, Head Research, Inventure Growth and Securities. And what specifically is the relationship of an appreciating rupee and Indias equities? FII equity investments in January 2012 alone totaled more than Rs. 11,000 crore and in February 2012 more than Rs. 7000 crore have come in till date. They have also invested huge amounts in the debt market in December 2011 and January 2012. In fact the rupee has appreciated from Rs. 54.5 to Rs. 49.5 only in January 2012 which is remarkable and which is directly relatable to the capital inflows says Jayraman. To the contrary, for the entire second half between July 2011 to December 2011 FIIs have been net sellers to the tune of Rs. 6700 crore, which has impacted the stability of the rupee and also the overall sentiment of the market. Therefore the policy of the government should be to encourage investment and instill confidence on long term basis with FIIs so that they would be proactive in looking at opportunities in the Indian economy, explains Jayraman. However, Kotak Securities Chouhan is more sanguine. The Appreciating rupee is an added

gain for FIIs. However, FII flows are driven more by factors governing debt and equity markets. So at the end of the day is the appreciating rupee good or bad for the economy? A moderate staggered appreciation of rupee is a good sign of growth and best environment to expect. In the case of India, it is still a day dream as the outflow of foreign currencies towards commitments of the government and otherwise is ever increasing and because of the sound capital inflows we are in a position to manage the stability of the rupee, notes Jayraman. A moderate strengthening of rupee against dollar over long periods is the most stable way for growth and development of our economy. New Trends A key change that may be on the cards is the decoupling of the Euro and the Rupee. Decoupling is the breakdown in the correlation between two factors. So a decline in the Euro could accompany a rise in the Rupee. The Euro could increasingly be driven by local factors including expansionary monetary policy and its dynamic need not reflect the global mood, notes Abheek Barua, Chief Economist, HDFC Bank. Currency Drivers Currency and its stability is a complex issue which is driven by demand and supply on a day to day basis. It is so sensitive that any abnormal economic activity globally or otherwise will have an immediate impact on the rupee against the dollar, says K Jayraman-Research AssociateBonanza Portfolo. It requires a combination of factors like economic growth, fiscal deficit being under control, trade deficits and proper balance of payments, moderate inflation and sound policies of government. Certainly the Indian government is doing its best and going forward 2012 will be a year of stability in currencies in a narrow range, he continues. Rupee range Shrikant Chouhan, of Kotak Securities expects the rupee to trade in the Rs. 48 to Rs. 51 range in the H1 2012 period. The rupee can still appreciate marginally from the current levels of Rs. 49.5 up to the Rs. 48 level in the next few weeks. However, if you take the H1 CY12 period the rupee can trade in a wider range depending on further capital inflows. Strikingly the rupee recovered sharply from Rs. 54.5 levels to Rs. 49.5 in January 2012, owing to FII inflows/ capital inflows on fresh allocation of funds to emerging markets particularly India during this year. - K JayramanResearch Associate-Bonanza Portfolio. In H1 CY12, we could see volatility in the rupee/dollar. But we dont see significant appreciation in the rupee from the current levels, says Milan Bavishi, Head Research, Inventure Growth and Securities. On the upper band dollar prices can rise again to Rs. 51.50. And the downside, we believe is limited to Rs. 48, he concludes.

What is the reason behind rupee value depreciation ?

September 25, 2011 Economy, Indian Economy

The past two weeks have been disastrous for the rupee value against dollar currency. The same time last month (22-Aug-2011), rupee value against dollar was 44.5 45.0 range, at this time of writing this article it is hovered to the range of 49.0 50.0. It is expected to raise further which would result in weakening the rupee value against the dollar currency. This kind of increase would have the drastic impact on the macro economy of the country like heavy raise in the import cost where countries like India heavily depends on the importing on Oil and other crucial raw materials needs for the industries.

This article explores the reason behind the rupee value depreciation, how RBI trying to defend the rupee value and how it is going to affect the industries. I come up with this article after the readers request to understand the currency war on recent days. If you have any thoughts, please post it in the comments section. Subscribe to our future articles here. also read:

Europe Debt Crisis What is Sovereign Debt problem? What is credit rating downgrade?

How currency value is determined?

We are not going deep dive into economic terms to understand the currency value fluctuation. There are many factors to decide the currencies values but that could be very difficult for the common man to understand the theory. Here I will put it in the simple words why the currency value is often fluctuated. A currency will tend to become more valuable when its demand is higher than supply. A currency will tend to become less valuable when its demand is less than supply. It is the basic theory. We need to understand in the global economy terms, when the currency will have more demand and when it will have less demand. Remember that exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries. Interest rates, Inflation and exchange rates are highly related. Reserve bank change the interest rates to control the Inflation and exchange rates. We can take our real time example of stock market investment to understand the above principle. As we know that, our stock market is dominated by the overseas investors (outside India), because of the our growing economy and industrial development. When our economy is doing well and market is performing better than other countries, overseas investors would invest heavily on our market. How they would put it in our market?. They will sell or convert to our currency and invest in India. It is clear that when more investors coming to India, the demand for the currency will be very high. Our rupee value will be increased against dollar. In the same way, when they are pulling out of market, demand for the rupee will be decreased and value is depreciated. Here I am talking only about the dollar, because it is the global currency and most of the countries trading using the dollar as trade reserve currency. The above example is given to explain it in simple words, the demand for a currency would come in the different way. When we are importing from other countries, we should have the currency of that country to pay for the trade. The value for the currency is fluctuated on real time. If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (CNY, ) was pegged to the United States dollar at 8.2768 to $1.

Why RBI intervene on Currency valuation?

In the last week we have seen RBI has acted to stop the erosion of rupee value against the dollar currency. What it did was sold the dollar currency in the market to increase the value of rupee. But, it is very difficult for the Reserve Bank of a country to adjust the value of the currency, the long term solution would be fix the problem in economy and bring the inflation into control. You would wonder why RBI has to intervene on currency value decrease or increase. Note that, RBI would not allow currency to be higher after certain level because of the exports would get affected like IT companies would suffer if the rupee get appreciated against the dollar. India is heavily depend on the import of raw materials and Oil for its industrial development. In the decreasing rupee scenario, the outgo of money will be much higher. This would affect the expenses for the companies who imports raw materials for their factory and all the Oil Marketing Companies (OMC) will incur heavy payment to import the Oil. Now you would have understood why the Petrol prices have been increase in the last fortnight. If you look into the news papers, the reason said by our finance minister was the depreciation of rupee value against dollar.
Major Factors Influencing the Currency Value

In the above section, I have explained in the simple words to make a common man understand the currency fluctuations. This sections write down few economic conditions when the currency value will be under pressure.The following are the three major factors influencing the changes in the currency values. There are many other factors too, but we are not talking about all the factors in this section.

Inflation o As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies (What is Inflation?). Interest Rates o A higher interest rates offer good returns compare to other countries. It will result in the foreign capital come into the country. Lower interest rates decrease the currency value. Note that interest rates has the close relation with interest rates. The currency value would not be affected only based on the interest, it is impacted based on the other conditions like inflation or economic situation. Current Account Deficits

Basically current account of a country presents the status on the trade of a country between other trading partners. If there is any deficit in the current account, that means country is doing more trading outside the country then its actual earning inside the country. This situation is not good for a country because the country needs to buy more foreign currency to fulfill its need inside the country. A country needs to manage its deficit within control, otherwise it will lead to a economic problem. More demand for the foreign currency would reduce the value of that countrys currency.

Impact of INR vs USD

In the last two weeks Indian rupee has depreciated about 7% against the USA dollar value. It is expected that it would continue the slide as many macro economic factors not in favor of Indian economy. The following are the factors which would slide down the rupee value.

Foreign Funds Outflow o It is the major concern of Indian economy now. Because of the global uncertainty and various economy crisis like Europe sovereign debt problem, US economy problem, etc leads to search for the safe heaven among the investors. They are quickly pulling out the money fro Indian market and investing in any other safe investments like Gold or US dollar. Government Deficit is High o The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10 per cent of GDP. It is high deficit and investors lost faith in the local economy. Political Uncertainty and Corruption o This is one of the major factor for any country to stabilize the economy. In India, last one year we are seeing the series of corruptions and there is no good news from the ruling party (Congress) about the economic reforms and lot of agitation among the citizens including the veteran Gandhian Anna Hazares campaign of Fight for Second Freedom which took attention from global media. India needs political change to gain confidence among the investors.

Summary

Updated (29-June-2012): The rupee value against dollar is around Rs. 57. It is expected that it will go further down in the coming days. The latest new reveals that India is in recession. The govt. data provided on the GDP is not correct, there is mismatch between the various sources released data. According to the real data, Indias growth is in the negative trend. We are moving back to the olden days. Please read this article. Understanding the currency basics is not as simple as reading this article. This article provides the very basic details about the Indias situation and devaluation of rupee in the recent time. If you would like to understand the different currency market in the world, please read the book Currency Wars. It is one of the best seller in the subject of the currency market.

I hope this article would have given an idea about the rupee depreciation and the reason why the currency is changed. But, there are hundreds of parameters to decide a currency value and politics also there to manipulate the own currency which China has done for a long time. The above are the very basic idea on currency value and how it is affected. If you have any thoughts, please post ti in the comments section.