Analysis of reasons behind the recent rise of Dollar against Rupee

By:
Shivam Srivastava
CS10B051
Abstract:
This paper analyses the reasons behind the recent rise of Dollar against Rupee as shown in
the chart below.
Chart showing the fall of Rupee against Dollar in the year 2013
(Credits: !.co"#
Contents:
Introduction
What happened to Rupee recently?
Why did that happen? A detailed analysis.
The impact of the fall in rupee.
What actions have been taken to curb it
Conclusion and References
ntroduction
The rupee has recently fallen to an all time low against the dollar in the foreign echange
market which has led to several debates! discussions and reforms in the Indian economy. The
echange rate of a currency has always been a topic of discussion as it indicates a number of
things ranging from the condition of the economy of a country to the policies that the country
has followed over the time.
!rend of Rupee in the past:
"efore diving deeper into the most recent trend let us have a look at how the rupee has
performed in the past.
Rupee"dollar post independence:
When India achieved independence in #$%&! there were no eternal borrowings in the balance
of payments sheet. 'ence! the echange rate on #(
th
August! #$%& stood at )# * Rs1. But to
reform the poor economy, the Five Year Plans (FYPs) were introduced. The
aim was to rin! aout a reform in various sectors such as a!riculture,
transport, communications, industry etc.
For the reforms, !overnment needed to raise money. "ence, it needed
forei!n orrowin! and this devalued #. The forei!n orrowin! was further
reinforced due to the $ndo%&hina (1'()) and $ndo%Pa* (1'(+) war. $ndia
orrowed mainly from the ,- and under pressure from the ,- to continue
providin! further aid, the rupee had to e devalued a!ainst the dollar. -o
rupee stood at .1 / Rs0 y the end of 1'((.
Rise of dollar in 1#$0s and %0s:
+ue to incompetence of Indian politics ,e- assassination of .rs. Indira /andhi0 coupled
with robust economic growth in the 12 the echange rate fell to )# * #1).1( y year
1'2+. By 1''3, it rose to .1 / Rs10.+
&ost liberali'ation:
$ndia was in hu!e dets as the fore4 reserves fell to new lows post
lierali5ation. -o, $ndia orrowed lar!e amounts from the $6F at the
e4pense of devaluin! the Rupee. 7s a result, the rupee hit new lows of .1
/ Rs)8.+2 durin! early nineties.
Rupee today:
Fast forward to )311 and rupee stands at .1 / Rs(2.2+ on 7u!ust )2
th

)311, it9s lowest ever.
This paper analyses the reasons ehind this sudden fall in recent times.
Reasons for fall in Rupee in recent times:
/oing by the fundamentals of economics! the price of something rises if the demand rises but
supply does not.
2o! if the demand of dollars rises ,red lines0 more than the increase in supply of dollars ,blue
line0! the price of dollars rises from 3# to 34. This is the general reason behind the rise in
dollar against the rupee.
Relation of fall in rupee to demand and supply:
2uppose a customer wants to import something from the 12. 5or this he would need dollars
as rupee will not be accepted by the 12. 2o the customer goes to the foreign echange market
to echange rupee for dollar. "ut he is not alone in the market. And given India6s imports are
larger than India6s eports! there are more people demanding dollar than there are people who
are demanding rupee. 'ence the demand for dollar is higher and rupee is devalued.
!he ma(or reasons behind the fall:
5ollowing are some of the relevant points. The points shall be eplained in terms of demand
supply later on.
#0 )uge !rade and Current Deficit: India imports more goods than it eports. This
results in a trade imbalance! known as a trade deficit. The figure was around )#7(
billion in .arch 48#4.
40 Reduction in capital inflo*s: 9ately! India has become an attractive destination for
foreign investors. India received ):8 billion through 5+I! in addition to )#7 billion
through 5II in 48##;#4. "ut due to uncertain conditions in the Indian market! policy
paralysis within the government and other domestic issues! the inflows have started
reducing in 48#:.
:0 )igh inflation: +ue to high inflation! most foreigners and <RIs tend to keep money
abroad. This is because keeping the same money in the country reduces its value due
to inflation.
%0 +S ,ed-s Bond Buying programme: =ne of the most significant reasons is the
sudden withdrawal of 5IIs from India. 12 5ed Reserve made an announcement
hinting at tapering off the fiscal stimulus programme ,>uantitative ?asing0 which
they had introduced in 4887 to help the 12 recover its economy. In 4887! the 12 was
in an economic crisis. 2o! the then Central "anker of the 12 5ed! "en "ernanke!
announced the idea of @>uantitative ?asing6. As a result! billions of dollars were
released in the markets as the 5ed bought government bonds and inAected money into
the economy. +ue to the higher liBuidity! the interest rates went down leading to a
boom in the emerging economies such as India! China! "raCil! etc. "ut this fame was
short lived. "en "ernanke in Dune 48#:! hinted at the withdrawal of the Buantitative
easing programme owing to the recovery of the 12 economy. Investors started
panicking! rates of interest in the 12 increased and the echange rates of these
emerging economies once again started to decline. +ue to this withdrawal! not only
rupee but several other currencies are at their own new lows as is shown by the figure
below. The picture shows the fall in the prices of the Asian countries in the past (4
weeks.
A different *ay to understand:
9esser the dollar in the market! the more will be its value and hence lesser the value of rupee.
9et us see how ecess imports impact Indian economy. The most important thing that India
imports is crude oil.

The countries from which India imports crude oil do not accept the Indian Rupee for
payments. They accept an internationally accepted currency such as +ollar or ?uro. As India
can6t print either of the currencies! it has to rely on other methods to accumulate
dollarsEeuros. The three main ways in which India gets dollars are as follows-
I0 "y eporting goods and services.
II0 5oreign investment in India.
III0 Remittance
This tells us that in order to keep importing the oil we need to keep getting dollars from the
above resources. If India runs out of foreign echange! it will not be able to import oil!
without which nothing will function. This balance of imports and eports is kept track of
using the Current Account Deficit. The CA+ is the difference between the imports and
eports of goods and services of the country! which in India6s case is continuously increasing.
=ne of the biggest factors worsening India6s CA+ is the ever increasing gold and oil imports.
The festival FAkshaya TritiyaG! for instance! contributes heavily to imports in gold which
made the CA+ even worse. "ut given only a limited amounts of foreign echange! India can
either buy more of gold or more of oil. If imports for gold go high! the available fore for
importing oil reduces. "ut demand for oil remains the sameEincreases! as a result it burdens
the economy even further.
=ne might suggest that eliminating gold imports can be the answer to improving rupee6s
condition. "ut a lot of people in the country earn their livelihood by selling gold. 2o! the
problem will be solved not by eliminating gold imports! but by eliminating the ever rising
demand for gold.
Another reason" ndian politics:
2everal reasons are cited for the fall in rupee. =ne of them is the incompetence of the
government. The people who vote for the government largely belong to the lower and middle
class families which vote not to have a better economy but to benefit themselves. As a result!
instead of focusing more on the economic reforms! government focuses more on other factors
as it has to maintain its voter base. 'ow does this affect in the long run? Warren "uffet6s
Buote summariCes this well- .nly *hen the tide goes out do you discover *ho has been
s*imming na/ed0 "asically! the investors are interested in the Indian economy only as long
as things are going fine. "ut as and when there is a crisis they move their money to the more
profitable markets. 'ere is what 2H3 ,2tandard and 3oor6s0 has to say about the economy-
FThe combination of a weakening political contet for further reform! along with economic
deceleration! raises the risk that the government may take modest steps backward away from
economic liberaliCation in the event of unepected economic shocksG
Conse1uences of the fall in rupee:
Do*ngrading of economic status:
India is now at the verge of being downgraded to FAunkG status. If this happens! India will be
the first in the "RIC category to lose the Finvestment gradeG. A FAunkG rating implies that the
country will be unable to repay back the debt it has incurred. India last had a Aunk rating in
early $8s. 2H3 has already revised its rating outlook to India from FstableG to FnegativeG in
April 48#4.
Benefits to the traders:
+ue to the fall! the eports to other countries will become cheaper. 2o the fall will make
India6s eports more attractive to foreign consumers. "ut the imports will suffer due to the
higher costs. This gives an edge to the domestic producers to compete with the international
sellers. 2o! the result is higher eports and lower imports which should reduce CA+ to some
etent. "ut the increase in eports will be limited as the goods eported reBuire inputs which
need to be imported.
,uel price:
As petrol is deregulated and diesel is partly deregulated! the increase in echange rate is
epected to be passed onto the consumers. If the =il .arketing Companies ,=.Cs0 increase
fuel prices! there will be increase in transport prices which will raise inflation.
Students studying abroad:
"ecause of the depreciating rupee! students abroad will pay higher fees and the barrier to
pursue education abroad increases.
!ourism:
+ue to cheaper rupee! it will be easier for people to tour India than the other way round.
)o* RB measures have helped recover the rates and *hy it is temporary:
The rupee has recovered from I7J to sub I4 as of #%
th
=ctober! 48#:. Karious reasons have
been cited. The main reasons being the following-
i0 Introduction of a @subsidiCed6 5C<R ,"0 deposit scheme. 5C<R ,"0 L 5oreign Currency
<on;Resident ,"ank0. This simply means that India is seeking help from Indians residing
abroad for increasing the inflow of dollars to the country. An 5C<R account helps <RIs
looking to invest in India without worrying about any currency risks. The currency which
comes into 5C<R has to be from the @permitted currency6 which include 12+! /"3! ?uro!
Men etc.
What really happens in an 5C<R is that the deposit made in the foreign currency is promised
back to the depositor later ,#year L ( years0 at a forward rate on the echange rate. This
forward rate is fied by the R"I. The more the forward rate! the worse for the banks as they
will need to return larger amount of rupees after converting them into the reBuired currency to
return. What R"I has done is that it has lowered the 5C<R rates from &N to :.(N. This has
given the banks the incentive to raise 5C<R funds as a result dollars start flowing in.
"ut this is temporary as the 5C<R deposit window is open only until :8
th
<ovember.
ii0 The R"I also allowed banks to raise #88N of their unimpaired tier;# capital through
overseas borrowing and allowed them to swap the funds at #88 basis points below the
prevailing market rate. What this means is that a few banks which Bualify ,have a certain
minimum level of capital0 can enter into dollar;rupee swaps with R"I for any currency
borrowed by the bank after #8
th
2eptember. The R"I has made the swap more profitable for
the bank by making available the swaps at #88 basis points lower than the market rate. #88
basis points are eBual to # percent. This scheme also lasts only till :8
th
<ovember.
An estimated )(.I billion have come in through the above two moves by R"I.
iii) Tapering of >uantitative ?asing has been postponed by a few months by the 12. "ut it is
estimated that very soon ,estimate ; +ecember 48#:0 the policy of easing will be withdrawn.
After the hint of tapering early in 48#:! )##.( billion of 5IIs have been withdrawn. There is
still an estimated )4I.( billion worth of investment which can eit once the tapering starts.
'ence! this is another reason that the stabiliCation of the rupee is only temporary.
iv0 The shutdown in the 12 slowed the growth of dollars.
v0 The epected uncertainty due to upcoming elections in India keeps the investors wary of
investing in the market.
Conclusion
This term paper briefly overviewed the recent situation of rupee against dollar and Austified
the possible reasons behind it. It also delved into the reasons leading to a recovery in rupee
after its fall.
References:
The following two papers were referred-
i0 'ierarchical Integration- The +ollar ?conomy and the
Rupee ?conomy L Anirudh Orishna and Dan <ederveen 3ieterse
ii0 An analytical study on Indian Rupee depreciation against the dollar L 2 2inghal
The papers can be found at-
http:;;pr<.co.in;setup;usiness;paper0.pdf
http:;;www.<annederveenpieterse.com;pdf;"ierarchy=)3>rishna?@P.pdf
In addition to the above the following sites were referred-
http:;;www.Ananciale4press.com;news;ra<an%reforms%to%fuel%13n%fcnr%
inBows;11(+1'3
http:;;www.Ananciale4press.com;news;fcnr%funds%to%e%used%for%shortterm%
credit%an*ers;112+31(
http:;;www.usiness%standard.com;article;Anance;+%reasons%why%rupee%
recovery%may%not%last%1111338331(1C1.html
http:;;5eenews.india.com;usiness;news;Anance;rupees%free%fall%how%it%
will%impact%youC2)1)).html
http:;;www.Duora.com;$ndian%Rupee;Ehat%are%the%reasons%for%Rupee%
fallin!%a!ainst%the%Follar