9Dec

Rupee Depreciation – 8 Practical Reasons

Rupee had fallen an all-time low on 28th August 2013 at 68.85 and now it is appreciating and currently standing at 61.13 as on 10th December 2013. Underlining principle is demand and supply which we all know but let me get to the real situation to explain the reasons in as concise manner as possible.

WHY RUPEE WAS DEPRECIATING

  1. Current Account Deficit – CAD of India was very high and stood at 6.7% of the GDP in the 3rd quarter of last year. As the current account deficit increases it raised questions on the ability of India to finance its major purchase deals or pay off its debts thereby putting pressure on rupee. Thus rupee depreciated. It was only when in 3rd quarter of 2013 that deficit came down to 1.2% of GDP at $5.2 billion and the rupee stabilized.
    Note: Current Account Deficit (CAD) means that the imports of goods and services are more than the exports. GDP means gross domestic product which is the market value of all goods and services produced within the country in a year.
  2. Measures of RBI gone wrong – RBI had put a temporary ban of import of gold coins and medallions to save forex reserves (still banned). Also company will now have to seek RBI permission to invest amount beyond their net worth i.e. 100% of net worth abroad (ban lifted). The effort was to limit the country’s CAD so that rupee can appreciate but the perception was something else. It created a skepticism in market about the main reason of restrictions and raised doubt about the viability of investments in India. As a result, FIIs are withdrawing funds from India and NRI are depositing less leading to weakening of rupee.
    Note: FII means foreign institutional investors i.e. the non-Indian companies registered with SEBI investing in India.
  3. Pressure on CAD by National Food Security Bill, 2013 – It injected fear among investors that it will widens CAD of India. While the food bill cost may touch an expenditure of anywhere between Rs 125,000 to 150,000 Crores, it may attract credit rating downgrades. India’s CAD is already at $5.4 billion and passing of this bill will just add to the misery (conflicting opinions).
    Note: National Food Security Bill, 2013 was signed into law on September 12, 2013. It aims to provide subsidized food grains to approximately 80 Crores people. Under the provisions of the bill, beneficiaries are to be able to purchase 5 kilograms per eligible person per month of cereals at the following prices:
    Rice at Rs. 3 per kg
    Wheat at Rs. 2 per kg
    Coarse grains at Rs. 1 per kg.
  4. Stock Market “Bloodbath” – Due to continuous devaluation of rupee, investors are worried about their funds in the stock market thinking that eventually they will be at loss if they keep their money in the Indian market. So they are selling their stakes and investors are losing their confidence thereby resulting in a downfall of index, near to bearish market i.e. “bloodbath” resulting in the further devaluation of rupee.
  5. Oil Marketing Companies’ (OMC) demand – Oil companies require $400 million daily for imports which intensifies the demand of USD. Also there is a backlog demand of $15 billion due to RBI oil swap windows. Major 3 OMCs require nearly $9 billion a month to pay for import bills. This leads to loss of foreign exchange thus pressure on rupee leading to rupee depreciation.
    Note: RBI oil swap window directly offers USD to 3 oil companies which is required to be paid back within stated time period. It was started in august and has been closed on Nov. 30 as the rupee stabilized.
  6. IMF and World Bank growth prediction – World Bank slashed its prediction of growth rate from 6.1% to 4.7% this fiscal year and IMF also predicted the same at 3.75% which lead to tension among investors. They are losing their confidence in the current scenario and withdrawing their money from the Indian market. It was only when that Prime Minister’s Economic Advisory Council chairman, C. Rangarajan gave a statement “The International Monetary Fund (IMF) and World Bank are unduly pessimistic. We think the growth rate will be between 5 and 5.5 per cent. We have projected growth rate of 5 per cent earlier, which I think still holds,” that investors gained confidence in India.
  7. US is recovering – A while ago, US adopted quantitative easing to inject money into the market to induce investments and cash flow. As of now, US is recovering and is planning to withdraw its reserves from the market which will also deprive India of foreign exchange (USD) leading to further depreciation in rupee.
    Note: Quantitative easing means buying the securities from the market to inject money (increase money supply) into the market and lowering interest rates thereby promoting liquidity.
  8. Speculation by Speculators – Last but not the least, speculation puts an additional pressure on the supply of rupee.

 

WHY RUPEE IS APPRECIATING NOW?

 

Raghuram govinda rajan became the 23rd governor of RBI on 5th September succeeding Mr. Duwuri Subbarao. Measures announced by him received good response as rupee started to appreciate.

  1. Higher interest to foreign investors – NRE (Non-resident External) which is a deposit account for NRIs is now allowed to offer maximum of 9.5% for 3-5 years of deposit to encourage foreign investments (while the same for Indians is 8.75% for 10 years).
  2. FCNR swap – RBI had opened a window to allow the banks to swap fresh FCNR dollar funds, mobilized for a minimum term of three years at a fixed rate of 3.5% per annum (for USD deposit) for the tenor of the deposit (now closed) and so it eliminated all the fluctuation risk among foreign investors.
    Note: FCNR means Foreign Currency Non-Resident which is an account maintained in foreign currency thus eliminating the need of the investor to convert it into rupee saving her from the currency fluctuation loss.
  3. 100% limit on overseas investment rolled back – As I stated in 6th point above, the 100% of net worth overseas investment limit is now rolled back to 400%.

Kindly comment if there are any mistakes in data. I would also like to hear your opinion on this subject.

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