Macroeconomic Factors affecting

USDINR

Concepts-Facts-Analysis

Introduction

• Rupee started depreciating after the perception of Greek Default• Starting from Greece, Ireland, Portugal, Spain and more recently Italy,

these euro zone economies have witnessed a downgrade of the rating of their sovereign debt, fears of default and a dramatic rise in borrowing costs.

• These developments threaten other Euro zone economies and even the future of the Euro

• Additionally political crisis in Middle East inflating the crude prices.

Demand – Supply ConceptSNo CAUSE EFFECT

1 FII pull out money so they sell Re Supply for Re Rises

2 Global sentiments & EURO crisis leads overseas investors to sell in India and buy $ as safe haven.

Supply for Re Rises

3 High inflation decreases purchasing power against other currency

Demand for Rupee decreases.

4 Current a/c deficit makes us Net debtor to rest of the world.

Supply for Re Rises

5 Political Instability hits foreign investor’s sentiments negatively.

Investments inflow decreases.

6 RBI Selling$ from its forex reserves to stabilize rupee.

No significant effect but decrease in forex reserves.

7 During Fy11-12 (april-dec)Exports = US $ 217.7Bn= 25.8% GrowthImports = US $ 350.9Bn = 30.4% GrowthTradeDeficit = US$ 133.3Bn V/s 96.2Bn= 38.5% Rise

Demand for $ increases.

8 Rise in Fiscal deficit results in to more external aids and borrowings.

Demand for $ increases.

Factors Affecting USD/INR1. Economic performance of the economy- GDP Growth-

2. Foreign capital flow

3. Inflation & Interest rate in the economy.

4. Balance of payment position of the economy- Current Account deficit-FDI Inflows

5. Fiscal position of the economy - Fiscal deficit & Its Causes

6. Performance of the stock market - Equity markets and FII flows

7. Efforts of the central bank in managing the exchange rates

8. Political stability

9. Global Currency Trend -

Correlation to movements in EUR and broad USD Index

Broad movement of peer currencies

Oil Prices

Source - http://planningcommission.nic.in/data/datatable/0904/tab_2.pdf planningcommission.nic.in

Due to Lower Agriculture & Industrial Growth the overall GDP is affected.

Economic performance of the economy• GDP is showing a slowdown QoQ & IIP

Data following similar trend in the industrial production YoY.

3 Factors behind High Inflation: • High food price inflation as demand

outpaced supply- Fall in agriculture output

• Manufacturing slowdown.(IIP Chart)• Rising global commodities prices of

food, Industrial material are transmitted to domestic prices in Cost-Push manner.

Results -• High interest rates and increase cost of

borrowing abounds. • This is a vicious cycle.• The rate of inflation, last reported in

March 2012, is close to the double-digit levels of 9.5 per cent.

www.rbi.orgCentral Statistics Office (CSO), Government of India.

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

2.3

5.2 4.62.6

7.9

5.2

-2.0

10.3

15.0

18.4

2.5

4.8

9.0

2.95.2

7.36.3

2.7

6.1 5.5

8.28.6

12.9

15.5

2.5

5.3

8.2

2.8

INDUSTRIAL PRODUCTION - GROWTH RATES

Mining & Quarrying Manufacturing Electricity General

0

2

4

6

8

10

12

14

16GDP

Inflation

Repo

Foreign Capital flow• Fall in Net FII

Investments & FDI Investments.

FDI Break up FY 2010-11ManufactureConstructionFinancial ServicesReal Estate ActivitiesElectricity and other Energy Generation, Distribution & TransmissionCommunication ServicesBusiness ServicesMiscellaneous ServicesComputer ServicesRestaurants & HotelsRetail & Wholesale TradeMiningTransportTradingEducation, Research & DevelopmentOthers

01-Jan-0701-Jan-0801-Jan-0901-Jan-1001-Jan-1101-Jan-12

-100000

-50000

0

50000

100000

150000

200000

Net FII Inflow Net FII Inflow (In Cr)

www.rbi.org

2006-07 2007-08 2008-09 2009-10 2010-2011

0

1,000

2,000

3,000

4,000

5,000

6,000

ManufaturingConstructionFinancial ServiesElectricty & trans-mission

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

80000Direct investment

Portfolio investment

Total (A+B)

Foreign Investment Inflow

Source- SEBI

Balance of Payment position of the economy

01-Jun-07

01-Oct-

07

01-Feb-08

01-Jun-08

01-Oct-

08

01-Feb-09

01-Jun-09

01-Oct-

09

01-Feb-10

01-Jun-10

01-Oct-

10

01-Feb-11

01-Jun-11

01-Oct-

11

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

Net Current Account (In USD $Mn)

Net CA = Trade bal + Invisibles

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

020000400006000080000

100000120000140000160000180000200000

OilNon-OilTotal

US $ mn

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

-250000

-200000

-150000

-100000

-50000

0

50000

100000

150000

I. Trade balance

II. Current account

III. Capital account = Foreign Invst + Comm Borrowings + Re Debt Ser + NRI Dep

Overall balance (II+III)

KEY COMPONENTS OF INDIA'S BALANCE OF PAYMENTS - US $

Trade Bal= Merchandise (Exports-Imports)

Fig indicated are -ve

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0.0

100000.0

200000.0

300000.0

400000.0

500000.0

600000.0Petroleum, Crude and ProductsGold and Silver Total Imports /All Commodities

There is 46.2% hike in petrol bill & 44.4% in gold imports Petroleum products are 69% of total import bill

Fiscal position of the Economy : -After targeting a fiscal deficit 4.6 per cent of (GDP) for

this fiscal year it is at 5.9 per cent..? REASONS :- 71000cr of revenue loss in petroleum sector = .8% of

GDP. Fertilizer subsidy increase by 17200cr to boost agri

output due to lower output in previous yr. Provision for food subsidy increased by 12250crTotal of 3 subsidy = 100451 Cr = 1.1% of GDP

o Drop in growth rate resulted into net tax revenue = 22800cr =.3% of GDP

o Due to volatile capital market Govt had to recalibrate its disinvestment program and accordingly 13895cr has been estimated against 40000cr.

Total slippage in revenue – 149356 Cr = 1.7% of GDP.

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0

50000

100000

150000

200000

250000

300000

350000

400000

450000 Gross fiscal deficit (Rs in Cr)

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0

1000

2000

3000

4000

5000

6000Net Aid (US $Mn)

Net Aid ...

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-110.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Short-term Debt* to Total Debt

Short-term Debt* to Foreign Currency Assets

Concessional Debt to Total Debt

Total External Debt to GDP

Source : Ministry of Finance & Reserve Bank of India

Govt. revenue inflows not in pace with its expenditure outflow

Short term debt to total debt on residual Maturity basis

Efforts of the central bank in managing the exchange rates

Source –www.rbi.org

RBI intervention in Forex markets

RBI conducted USD selling interventions in the spot during Nov Feb for USD 20.5 bn

CRR reduced to 75bps,Repo Rate cut to 50bps & Reverse Repo rate cut to 50bps.

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11 0

50000

100000

150000

200000

250000

300000

350000

SDR (USD Million)

GOLD (USD Million)

Forex (USD Million)

Reserve Tranche Posi-tion (USD Million)

Total (USD Million)

FII flows in Indian markets Forex Reserve

Global Currency TrendINR moving in line with other EM currencies.

• Currencies in BRIC nations also depreciating and maximum effect is seen in South Africa but reverse effect in China.

Source : Bloomberg

Germany

Russia

ChinaJapan UK

Australia

France

CanadaBrazil USA

India

-6

-4

-2

0

2

4

6

8

Current A /c to GDP(%) in Major Countries & BRIC Nations

CA to GDP

Japan USA

France UK

Canad

a

German

yIndia

China

Australi

aBraz

il

Russia

0

50

100

150

200

250

Debt to GDP In Major Countries & BRIC Nations

• The US, the world’s largest economy is struggling.

• UK has announced a double-dip recession and the end of the Euro zone crisis is nowhere in sight.

• China is dealing with wage increases, pressure to allow its currency appreciate and issues with overcapacity.

• Sanctions on Iran will also mean that oil prices may spike leading to further economic pressures.

• Any global crisis means the availability of credit will become tight leading to a squeeze in investments and less borrowing to fund any projects for both government and private sector

Economic conditions in Global Scenario

ChinaIndia

Russia

Austraila

JapanUSA

Canada

Germany

Brazil

France UK

8.1

5.34.9

4.3

2.72 1.8 1.7

0.80.33 0

6.31

8 8

3.5

0 0.251 1

8.5

10.5

3

7.55

3.6

1.6

0.4

1.71.2

1.9

4.99

22.8

GDP-Int rate & Inflation in Major Countries & BRIC Nations

GDP % Interest rate Inflation

Source-tradingeconomics.com

Political Stability

The verdict in the state elections and increasing pressure from its coalition allies means that the government cannot go ahead with much needed reforms.

FDI in retail, aviation and other sectors in the parliament has stalled because the ruling UPA is unable to make any decisions with its back against the wall and facing the prospect of an early election of it refuses to toe the populist line.

The much-awaited goods and service tax (GST), decontrolling of diesel prices, have all been put on hold.

Not wanting to antagonize the electorate or its coalition allies, expect the UPA to trudge along without making any policy changes that can propel the economy forward

Global crisis 0r Lack of growth opportunities

leading to negative foreign

inflow

Increases the CAD as outflow

exceeds inflow = Demand for $

leading to depreciating Re.

Oil Imports remaining high leading to huge

payments due to depreciating Re

Cost of Input goods goes up leading to

increase in prices of output products = More spending & less savings that disturbs liquidity

system in economy.

Affects GDP, Increases Inflation, Increases Interest

rates leading to high cost of borrowing

(Encouraging ECB) and decreases output =

Lack of growth Opportunities.

Appreciating Rupee

Policy measures to be taken on political front leading to growth opportunities to attract foreign investments = Raises demand for Re

Wait until Euro debt issue is resolved as investments across the world are inter-linked & investors are now buying $ as save haven instead of Gold

Once Re appreciates the oil import bill will reduce resulting in to lower cost of input & output prices = more savings leads to increase in money supply

Money supply increases, so cost of borrowing reduces = growth of industries = rise in GDP = Investment Opportunities

Depreciating Rupee Cause-Effect-Solutions

Thank You

Tamanna Edmund Keen

Economist – Planner-CFA-CWA(Final)

School Of Planning,

CEPT University, Ahmedabad.