There is no uptick in the chart, no hope, only way he is heading is downside. Indian rupee is touching a historic low of Rs. 62 against US dollar is not happened before. If rupee value going down mean there is something terribly wrong in our macro economics and policies. There is a huge imbalance or difference in imports and exports. Not only that, India’s loan book is raising to new highs. Economists predict that now India is repeating its 1991 (darker period in Indian economy) story.
How many of you aware of the 1991 story?. India is bankrupt and there is no money with Indian govt. to pay the daily bills. The amount of debt is very huge. That is the time when India has opened the globalization gate to foreign companies to tackle the situation. But, we are not in similar situation, but if we are not making good policies to recover from the lows, we may repeat the same story. Here is the example for bankrupts, Greece and Spain. It may come to us after 20 years of time, if we are not taking strong decisions to revive our economy today.
I have earlier written about rupee value depreciation and its impacts. These articles received huge attention from our readers. This article explores major factors influencing the rupee value and how it impact the Indian customers. I have taken data from various resources to present this article more comprehensive, I would like to hear your thoughts on the future trend of our economy.If you are interested in receiving our future articles, please subscribe here, like our facebook page.
Rupee Depreciation / Decline Chart
If you analyze the below chart, rupee has depreciated more than 45% in the past 5 years of time. It is a huge change in terms of economy and import cost. This would explain all the story why most of our imported products are expensive these days. There are numerous reasons why rupee value has eroded steadily like this never before.
Some of the obvious reasons for rupee decline is:
- Our import is more than our export and the difference is becoming wider.
- Due to the economy development and urbanization, import of Oil products are very huge and it increases the import bills of our country. On the contrary, there is not much improvement on the exports.
- Import of Gold is another salient factor that increases the import bills.
- India is heavily depending on the services sector for the exports, it is not viable for the long term. We have improve our manufacturing sector to stimulate the export to balance import costs.
- Foreign outflows from Indian market. As we are aware, Indian market is largely funded by the foreign investors. Their fund would stay in our country if the economy is good. Due to the downtrend on our economy, foreign fund managers pulling their money back. It is one of the important reason why our currency value keep going down.
The above points are at higher level, each can be discussed in detail.
If you want to know more details about the factors that are influencing the rupee value, please read my previous article about rupee value depreciation.
Current Account Deficit
In economics, current account is one of the primary component in balance of payments. Difference between exports and imports is known as the current account deficit. A country’s current account surplus increases the net foreign assets, deficit does the reverse. Normally, current account is calculated adding the Goods, services, income and current transfers (donations). Increasing current account deficit is dangerous for a country. IMF sets the 6% of GDP as the dangerous level for any country. In the last fiscal year (2012-13), India’s current account deficit was ended at 5% of GDP. A deficit on the current account (CAD, in short) means that India has to pay out more than it receives on these transactions. The below graph shows the current state of our current account deficit. If you look into the below graph, in fact India has a current account surplus in the years 2002-2005 and then situation reversed.
- Reducing the need for imports. It is the reason Indian. govt. increases the custom duty on gold to reduce the import quantity.
- Offer stimulus to the manufacturing sector and increases the exports.
- Increases the interest rates in Indian deposit products to attract foreign individuals to invest in India.
- India in danger of another crisis?
It is another important component in balance of payments. Capital Flows can be divided as foreign direct investment, portfolio investment, reserve account and other investments. Foreign Direct Investment (FDI) is popularly known in India. It is the investment from foreign companies or entities to Indian companies. This investment is for the long term and it is huge inflow to the capital account. Portfolio Investment is nothing but investing on the shares of Indian companies. These investments are not for the long term in nature, if our economy is good, foreign companies would buy shares from Indian capital market. What are the factors to increase the capital flows:
- This is largely depends on the country’s foreign investment policies. If we liberalize the rules, foreign companies will come to India for the investment. Note that, allowing FDI on all the sectors are not good. Most of the times foreign companies may go against our national interest on caring the customers.
Abroad Education / Loans Becomes Costlier
One of the most impacted sector is the foreign education for Indian students. Anand, who got seat in one of the foreign university had a dream of studying MBA degree in foreign countries. As he dreamed, he got placement in popular university in USA. Also he received total expenses bill for his education is Rs. 15,00,000. This is when he received appointment letter from university 6 months ago. Few fays back he has received another letter stating the revised expenses which is around Rs. 19,00,000. What makes more expensive within 6 months of time?
- If you are planning for abroad education, foreign exchange rates will impact your cost of education.
- You have to pay your expenses in the foreign currency. It means that, if you are planning to study in USA, then you have to pay in USD. For example, when you apply for a degree the exchange rate is Rs. 50 for 1 USD. It costs Rs. 50000 for 1000 USD. Actual cost of the degree will remain same in the foreign currency. Say, in the next 6 months rupee slides to Rs. 60 for 1 USD, now the cost would have increased to Rs. 60000. A steep increase of education cost.
- This difference would make problem to the students for getting higher loans. They may not have eligibility for the revised expenses.
Rising Fuel Bills
Fuel price is deregulated to the oil companies. Prior to that, govt. has the authority to set the fuel prices for the public. Oil companies has to claim the subsidy from the govt. for the loses. This loss is very huge and govt. can not afford to pay the huge subsidy bills, ultimately petrol and diesel prices are deregulated and companies have the freedom to increase the prices on their interest. Rising fuel prices are major concern for India and it also increases the inflation. What makes the oil price costlier?
Import cost is the one major factor influencing the oil prices. We are in need of oil for more than 85% of daily needs. We don’t have enough oil wells to procure from our domestic companies. Also the economic development and industrialization increases the need for more oil supply. The need for oil is keep increasing with more development works. When we import oil, the trade is done through USD. Any depreciation in our currency would increase the payment for oil imports. Read the below table on top 10 oil importing countries.
Source : WikiPedia
Crude Oil Price:
It is obvious factor we should know. The price of the commodity in the open market is always a major factor for the cost. The below picture explains the up and down of crude oil prices since year 1861. rude oil prices are determined by the factors production, demand and supply, global oil inventories and many other global factors. It is not just in our control. For example, when world economy is in good shape, demand for the fuel will increased and crude oil prices will increase. If you look into the below chart, after the 2008 recession, crude oil price sharply come down because of low demand. (Read: 7 Factors Influencing Crude Oil Prices )
Foreign Holidays Expensive
Another shattering dreams are planning for the foreign trip to favorite countries. The expenses are very high due to the drastic change in the currency value. However, who are visiting India will benefit from the cheaper. Only people who are visiting outside will have to spend more money. Tourist spots in India reported that foreigners visits are increased due to the rupee decline. For them it is cheaper.
Of course, inflation will go up if fuel, electronics, imported goods, essential food products, etc. all go up. It is the gift of globalization to our country. We are loosing our self reliance for the food. We have started using all the foreign products in our daily life, it becomes unavoidable for everyone. Any spike in the rupee will have huge impact on the prices. If you are looking to by iPad for your daughter, you will be surprised to see the sudden price increase due to the currency value. We have to be ready to handle this situation once we adopted the globalization and allowing FDI in every sector.
Who are Beneficiaries?
Non-Resident Indian (NRI):
Don’t think that everyone is loser because of the rupee value decline. One of my friend is very happy seeing the rupee value coming down as his two brothers are working in USA. Their remitting more income then before to their parents. It helps all the NRIs who are working abroad will have a edge on this situation. It is a golden period for them.
Services sector companies will have a golden run in this period. Especially for software companies who can earn more income because of the forex fluctuation. However, there are other expenses which may offset their income for some companies. Companies who has more employees working abroad and frequent travels by employees would very expensive. Not only that, processing visa fees also will be expensive. Only companies who are working from India and earning in foreign currencies will have good time.
Freelancers / Bloggers:
Those who are working from home for the foreign companies and full time bloggers would have good reason to smile if they are receiving their monthly cheque in the foreign currency.
Where we are going?
There is no clear answer to this question. In the current scenario, most of the analysts predicts that rupee will trade in the range of Rs. 65-70. There is definite reasons to assume that why the rupee will trade around these levels. India is a net importer and import bills are always higher than the exports. This is resulting in a high Current Account Deficit (CAD). There is no short term solution to rectify this situation, if we take measures now, it take quite some time to impact on the rupee valuation.
Apart from the high CAD, India has the external debt (government and corporates) of $ 390 billion, out of which is coming for the repayment on March 2014 is around $ 172 billion. If we make the repayment of these debts, it results in the more selling of our currency putting lot of pressure to depreciates further. RBI has done everything possible to curb the rupee depreciation, there is nothing left with RBI to do much more.
Another spoiler here is the political condition. We are expecting general election by next year, there will not be any strong measures to curb this situation. Also freebies will be announced by the govt. to attract the voters. This will cause further damage to the injured economy. We need a strong policy makers who can control and define future of India. Sad to say this, we are in serious crisis but it is not too late to recover from this.
RBI intervention is never a solution and not that should be used by the central bank. RBI’s focus should be on inflation, and not on defending the currency. Last week the RBI announced that it will auction Rs. 22000 crore of government cash management bills every Monday to drain cash from the system to support the rupee. This will help only in the short term and not encouraged.
Lets keep our finders crossed. Have you complete reading this article? Please share your thoughts about my analysis in this article. If I miss something important, please write it in the comments section. If you are interested in receiving our future articles, please subscribe here, like our facebook page.