Is Depreciation of Indian Rupee Good?

Is Depreciation fo Indian Rupee Good?On August 28, 2013, The Indian rupee hit new historic low level of 68.75 against the US dollar. Year 2013 has been a very eventful year. But If I were an MBA Institute’s GD evaluator, I would chose the topic “How the Depreciation of Indian Rupee Impacts India- Good or Bad?” before anything else. After all, Its MBA and I will definitely give more preference to someone who understands the Indian Financial Domain. This topic is very very very important this year. Expect questions in PI round as well from here.
The concept maybe very confusing at first but what Depreciation of Indian Rupee simply means is that we need to spend more rupees to get the same amount of dollar. Easy… Right? But you will be further clear when you read the points below.

BACKGROUND:

During Independence, the value of $1 was equal to Re.1. And now it is lingering in the sixties. In a nutshell, that’s never a good sign. But there are certain advantages to certain people from this.

NDTV Profit on Aug 22 2013, highlighted following main reasons behind the Rupee Depreciation:

  • Growth slowdown: India’s gross domestic product (GDP) growth fell to a decade low of 5 per cent in 2012-13. The situation is unlikely to improve much this year. Foreign investors are pulling money out of the Indian markets due to slow growth.

Is Depreciation fo Indian Rupee Good?_2

  • Widening current account deficit: This is resulting in creating more actual as well as speculative demand for the dollar and other convertible currencies.
  • Dependence on foreign money: India’s current account deficit was financed by foreign money for the last many years. Withdrawal of money by overseas investors is leading to the weakness in the rupee.
  • Recovery in the US: The slow but steady recovery in the US is making the green buck stronger against other currencies.
  • Capital controls: The decision by the Reserve Bank and the government to impose temporary restrictions on capital flows has not gone down well with the markets, as it will not only discourage Indian companies from investing abroad, but also foreign firms from pumping money into India.
  • Oil Prices: It is another factor that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. The domestic demand for oil increases which causes the price of oil to increase in the international market. The demand for dollar also increases to pay our suppliers from whom we import oil. The effect is cumulative like an Avalanche breakdown. This increase in demand for dollar weakens the rupee further.

This background is a little difficult to digest for a lay man. I have tried to keep it simple but whatever you do not understand, just get it cleared. Google it. Post it in the comments. Discuss it. But get it cleared. Just by understanding those few points you can win the hearts of the evaluators. On this topic, they are also looking at how much you know, amongst other things.

POINTS IN FAVOUR:

  • IT Boom again: The best business prototype anyone can have is to spend in rupees and earn in dollars, which is what the giants of India Inc, including the top IT companies, excel in. IT industry directly employed to about 2.8 million, and indirectly 8.9 million people by the end of 2012 and is one of the major contributor to India’s GDP.
  • Good for Export Oriented companies: Basically the sector which is targeting exports for its industrial operations are the one wins the game. Dollar appreciation would be positive for sectors such as IT, pharmaceuticals, hotel, textiles and automobiles which have the total foreign exchange earnings of these firms are far greater than their forex spends. As much as the rupee weakens, the foreign exchange earners gain, provided the other factors remains constant. More money in hand for the same dollars received!
  • Better Domestic Competitiveness: Since the competition from foreign players in the market is substantially lowered, it gives a great opportunity to the domestic players to take advantage of the situation. Also improved domestic Competitiveness is considered good for India’s self sufficiency motto.
  • Happy NRIs: NRIs will smile in this context as they gain more on sending money to their homeland. Due to this Indian families which receive money from their non-resident brethren are no longer stashing it all away in property investments or bank deposits. Instead, they are spending more.
  • Better Tourism: The Tourism Industry is prospering as India become a cheaper holiday destination for the foreigners who are attracted to our countries diverse culture.

POINTS AGAINST :

Is Depreciation fo Indian Rupee Good?_3

  • Import Doom: Importers and buyers of imported goods will be affected the most as importers will have to pay more rupees on importing products which will to a great extent be burdened on the end buyers. For example if you bought a product valued $1, that means you paid around Rs 58 for that few months but now you will get that same product for Rs 68. Those employed in the import industry directly or indirectly will see that the employers cut costs by either by reducing salaries or human resources.
  • Rise in Oil Prices, Inflation: Oil marketing companies will also feel the pressure of weak rupee which in turn will be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. If OMCs increases fuel prices, there will be a considerable increase in overall cost of transportation which will lead to inflation. Car companies are already revising their prices as they are dependent on several things like imported raw material, borrowings in foreign currency, pay royalties to their parent firms and have loans. Consumers of imported paperbacks and gizmo should be ready to pay more. A depreciation of 10% is expected to lead to 0.6-0.8 percentage point increase in inflation
  • Studying abroad? : Students who are studying abroad have to bear the burnt of depreciating rupee. Expenses towards the university/college fee as well as that of living will increase, thereby spelling a huge burden on the students.
  • Increasing Current Account Deficit : Country’s fiscal health will be affected as a frail rupee will add fuel to the rising import bill of the country and thereby increasing its current account deficit (CAD). A widening CAD will definitely pose a threat to the growth of overall economy. A depreciation of Rupee by 10% leads to 0.44% of GDP increase in CAD.
  • Postponed Foreign Investments : Depreciation of Rupee will impact confidence of investors on the country’s caliber. So, most foreign investors will postpone investment till things stabilize.

POSSIBLE CONCLUSION:

Though the Rupee Depreciation has a silver lining to it for some of the people out there but its impact on the whole country has been beyond imagination. There is a dire need of regulated reforms by the RBI and Indian government to regain the confidence of foreign investors and for the stabilization of the market. It is a real threat for the country’s overall fiscal health and increases the current account deficit heavily.

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13 thoughts on “Is Depreciation of Indian Rupee Good?

    1. Amar.. The capital flow in and out of the market has a big role to play in determine the value of rupee. RBI has mandate over the banks and has the liberty to formulate various policies that allows them to lend more or give more, thereby increasing the capital flows. I suggest you go through this news article once and see an example of how rbi can control capital flow.
      http://m.thehindubusinessline.com/industry-and-economy/banking/rbi-further-eases-norms-to-encourage-capital-flows/article5113188.ece/

  1. This is the best website for WAT GD/PI preparing… keep it up and post more informational articles… i m sure more and more hits are on their way 🙂

    1. So,since late 2012, the US central bank, the Federal Reserve (or simply the Fed), has been spending $85bn a month to boost the US economy. They, basically use it to buy assets – a mixture of US government debt and mortgage bonds. This has the effect of driving down US interest rates, including the cost of mortgages, car loans and financing for business. Tapering means basically reducing this monthly support. So in dec 18, 2013, they tapered it by $10bn. This is an optomistic indiacation that the FED believe that US economy is recovering.

    2. Best article for engineers.Thanks for consolidating the vast information & bringing it into a single article.Can you explain GDP and CAD in laymen words?

  2. Brilliant Article..Explaining such jargon in such a simple manner..Sir could u please elaborate a bit on the measure the RBI and planning commission can take to curb this depreciation? (A reference to steps taken by Raghuram Rajan would be awesome)

  3. Excellent article..can you please explain how oil prices cause depreciation. what i understood was that it puts pressure on CAD..after CAD imbalance can you please explain the list of consequences that lead to Currency depreciation.

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