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Presentation by: Nelson Kuriakose
LEAD College of Management,
Palakkad
61.90 INR against 1$ at 12.21pm 25th November 2014
Todays Range: 61.8625-62.0387
Yesterdays closing value: 61.9325
What is depreciation of value?
When there is a devaluation in the Indian Rupee it means that
Indian exports become cheaper, but imports are more expensive
for Indians to buy.
In particular, a devaluation in the Rupee is bad news for
Indians who need to import raw materials, such as oil and gold.
Why?
Lack of competitiveness / inflation.
The long term decline in the value of the Rupee
reflects India’s relative decline in competitiveness.
In particular, India has a higher inflation rate than
its international competitors.
Current account deficit.
A consequence of poor competitiveness and highdemand for imports is a current account deficit.This means India is purchasing more imports ofgoods and services than it is exporting. A largecurrent account deficit tends to put downwardpressure on a currency. This is because morecurrency is leaving the country to buy importsthan is coming in to buy exports.
The present CAD of India is 7.8 Billion USD
1.7% of GDP
A country can reduce its current account deficit byincreasing the value of its exports relative to thevalue of imports. It can place restrictions onimports, such as tariffs or quotas, or it canemphasize policies that promote exports, such asimport substitution industrialization or policiesthat improve domestic companies' globalcompetitiveness. The country can also usemonetary policy to improve the domesticcurrency’s valuation relative to other currenciesthrough devaluation, since this makes a country’sexports less expensive.
Oil Prices
India is a net importer of oil. It has to buy oil in dollars.
Therefore, rising oil prices worsen India’s current
account and also weaken the Rupee. More Indian’s
Rupee’s have to be spent on buying oil.
Current Price of one barrel Crude oil is 75.78
USD as on 2.25pm 25th November 2014
ImpactsInflationary pressures
India is trying to control inflation, which has been runninginto double digits. But, devaluation makes itself makes itharder to control inflation. The devaluation increases theprice of imports, such as oil and fuels, leading to cost pushinflation. Also, devaluation is considered an ‘easy’ way ofrestoring competitiveness, therefore devaluation may reducethe incentives for exporters to work on improving long-termcompetitiveness. Finally, devaluation can help boost domesticdemand. Exports will rise and consumers will switch todomestic producers rather than imports. This can causedemand-pull inflation.
Economic growth
A devaluation can boost domestic demand and short-termeconomic growth. However, this is not necessarily helpful forthe Indian economy. India’s economy needs to concentrateon boosting productivity and long term productive capacity,rather than relying on boosting domestic demand. The rapiddevaluation has also caused a loss of confidence ininternational and domestic investors. With a history of quickdepreciation, foreign investors will be more nervous ofinvesting in India. The devaluation and inflationary impactwill also discourage domestic investors, e.g. firms worriedabout future oil prices. This reduction in investment isdamaging to long-term economic growth.
Devaluation spiral
The concern is that high Indian inflation causes
devaluation, which in turn feeds into more cost-
push inflation. Thus it becomes a difficult to escape
out of this unwelcome negative spiral of inflation-
devaluation-inflation.
What is the value of money
sending from abroad to
India when rupee
depreciates?
Policies to stem devaluation in Rupee1. Supply side policies to improve competitiveness
2. Reduce dependency on foreign oil, through domestic andrenewable energy.
3. Monetary policy to tackle inflation and reduce domesticdemand. But, will conflict with lower economic growth andlead to higher unemployment.
4. Financial controls, e.g. limiting the amount of gold imports toreduce the current account deficit.
5. Liberalizing the formalities for gaining Export license.
6. Liberalizing export duties for EPZ.
