CURRENCY FLUCTUATION & Implications On India

Presenters Sakshi Gupta Soumyajeet Patra

Rishi Jitendra Tripathi

Shivangi Mangal

Currency Fluctuation
Currency fluctuations The root of the global dominance of free float regime could be traced to the development of exchange rate regimes since the World War II. Ongoing changes between the relative values of the currency issued by one country when compared to a different currency The process of currency fluctuation occurs every day impacts on relative rate of exchange between various currencies on a continual basis. It is currency fluctuations that investors in currency exchange deals look to closely in order to generate a profit from their investments.

Factors Affecting
Economic Position Market Speculators

Foreign Debt

Balance of Trade

Economic Indices

Currency Fluctuation

Interest Rates

International Profits

Inflation

National Income Or GNI

Impact on Currency Fluctuations on SMEs

Different Stakeholders affected differently Currency Appreciated- benefit to importer, drawback

For exporter it is vice-versa

Impact on Borrowers: Foreign currency depreciated, loan taken from abroad & vice-versa
High Risk Involved

PROTECTION AGAINST CURRENCY FLUCTUATION

The two main options available to help businesses manage these risks are forward contracts and currency options :-

Forward Contract or Forward Foreign Exchange Contract Currency Option Opening Foreign Currency Accounts

MINIMIZING IMPACT OF DIFFERING IN CURRENCY FLUCTUATIONS

Develop strong banking relationships globally Barter has become a very inventive way of allaying the fluctuation in currency Imperative to seek advice and then enter into long term contracts Thinking Globally Change in the global business environment.

Currencies w.r.t. Rs
120
100 Axis Title 80 INR/INR 60 40 20 0 USD/INR EUR/INR GBP/INR CAD/INR

Currency w.r.t. CNY

12 10 Axis Title 8 USD/CNY 6 4 2 0 EUR/CNY GBP/CNY

CAD/CNY
INR/CNY

How Dollar Fluctuations Impacted the Indian Economy??

Switching to Floating rate model from Fixed rate model (1991) Huge inflow of foreign capital into India in US dollar through FDI/FII Concentrating more on Exports for FX Reserve and to reduce Balance of payment (BOP) gap rather than the imports The fluctuating rupee has depreciated significantly against major currencies. From approximately Rs 54 on March 31, 2013, the dollar value zoomed to approximately Rs 60 on June 30 an above 10 per cent decline in the rupees value. For worried Indian companies with foreign currency exposure, the primary concern is to protect their profit-andloss arising on foreign current assets/ liabilities.

Risk Involved due to Currency Volatility

Transaction Risk Economic Risk Translation Risk

TRANSACTION RISK

It is the impact of exchange rate changes on the value of committed cash flows/ assets or liabilities recognised in financial statements, such as foreign currency loans, receivables and payables. Under accounting standard AS-11, the exchange gain/ loss arising on restatement of foreign currency monetary items should be recognised immediately in the profit-and-loss. However, to address the concerns of Indian companies, the Ministry of Corporate Affairs amended AS-11 to give companies a one-time option in which they can defer/ capitalise the exchange differences arising on long-term foreign currency monetary items. This option has helped companies address immediate concerns over profit-and-loss fluctuation. However, capitalisation of significant exchange differences to fixed asset cost may raise impairment concerns. In either case, due to restatement at closing rate, the foreign exchange liability of the company in rupee terms increases. This may adversely affect the debt-equity ratio and create other business challenges related to compliance with debt covenants and raising new loans.

ECONOMIC RISK

It is the impact of exchange rate fluctuations on the current value of uncertain/ uncommitted future cash flows. This will include, for example, impact on future revenues and expenses. Generally, rupee depreciation negatively impacts import-oriented companies as input cost increases. Many of these companies may not be able to raise the selling price due to competition.

For export-oriented entities, a decline in rupee value results in higher realisations. However, a customer may renegotiate rates and thereby neutralise the positive impact. It is also likely that after the rupee value increases at a later date, the customer may not increase the price.

TRANSLATION RISK

This refers to the impact of exchange rate change on the financial statements of a foreign operation, such as a foreign subsidiary, included in the companys consolidated financial statements (CFS). Under AS-11 the net impact arising on translation of non-integral foreign operation should be recognised in the foreign currency translation reserve (FCTR). Still, any movement in exchange rate is likely to impact numbers in the CFS. To illustrate, assume that an Indian companys US subsidiary has generated the same revenue (in dollars) as in the previous year. However, due to a decline in the rupees value, it will present significantly higher revenue in the current CFS. Similarly, the US parent, while consolidating its Indian subsidiary, may end up presenting significantly lower revenue due to the exchange rate movement. To manage/ minimise the impact of exchange rate fluctuations, a comprehensive risk management policy is needed, covering all the key risks. While taking care to avoid knee-jerk reactions, companies should also provide adequate disclosures in the financial statements.

Ranking & Predictions of Indian Economy

India's GDP at current prices will overtake that of France and Italy by 2020 and that Germany, UK and Russia by 2025. By 2035, India is expected to be of 3rd largest economy in the world behind US and China overtaking Japan. "In thirty years, India's workforce could be as big as that of the United States and China combined. Presently India is the third largest economy in the world as measured by Purchasing Power Parity (PPP) and twelfth largest in the world as measured in USD exchange-rate terms, with a GDP of US $1.8 trillion. The recent episode of massive depreciation in rupee-dollar exchange rate has been blamed on the deterioration of the current account in Indiain tune with the fourth regularity mentioned by Mussaby both the academicians (Marjit, 2012) and policymakers (Reserve Bank of India, 2012). However, the high crude oil prices in international markets have been held responsible for the deteriorating current account balance.6

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