Assocham Exchange Rate Study

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Exchange Rate Slide

What Impact Is It Having


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I. Falling Rupee and Its Impact

Since the current round of global uncertainties started after the downgrading of USA and the

increasing threat perception of a Greek default, the rupee has been depreciating. Earlier as well,

the rupee has been unsettled whenever the global economy showed signs of trouble as in 2008. A

look at the pattern of rupee in comparison to the four major currencies shows that since April

2011, there has been a depreciation trend that is much more visible. (Fig 1)

Fig 1 Exchange Rates


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Such wild fluctuations in the rupee exchange rate within a short span of time are unsettling and

leaving its imprint on the rest of the economy. The depreciating rupee will add further pressure

on the overall domestic inflation and since India is structurally an import intensive country, as

reflected in the high and persistent current account deficits month after month, the domestic costs

will rise on account of rupee depreciation. The rupee depreciation will particularly hit the

industrial sector and put higher pressure on their costs as items like oil, imported coal, metals and

minerals, imported industrial intermediate products all are getting affected.

A. Impact on Oil Imports

Oil imports consume he largest part of the forex reserves. A depreciating rupee is bound to offset

the decrease in the international prices of commodities such as oil. As can be seen from the

figure below although the oil price per barrel has fallen however the depreciating rupee has not

given any respite to the importer as they actually have to shell out more money in order to

On the basis of ASSOCHAMs

interactions with market players, there

could be two possible scenarios:

Scenario 1: If the global recovery does

not take place and the pattern of flow of

funds away from the Indian economy

continues as it has done in the recent

months the exchange rate could well

reach the levels of 53.8 in January 2012

and 55.1 in March 2012.

Scenario 2: If global economies areable to recover and the funds start to

flow again into the Indian markets then

the exchange rate would settle for

somewhere around Rs 49.50.This would

also be the new normal level of

exchange rate.

USDollar

PoundSterling Euro Yen

2011

Jan 45.4 71.5 60.5 55.0Feb 45.4 73.3 62.1 55.1

Mar 45.0 72.7 63.0 55.0

Apr 44.4 72.7 64.3 53.3

May 45.0 73.4 64.3 55.4

Jun 44.8 72.7 64.5 55.7

Jul 44.4 71.7 63.2 56.0

Aug 45.5 74.4 65.4 59.0

Sep 47.6 75.2 65.5 62.0

Oct 49.3 77.6 67.7 64.2

Nov 52.7 81.4 69.9 67.3

Dec 53.1 81.8 70.3 69.2

2012

Jan 53.8 82.1 71.8 70.5

Feb 54.5 83.4 72.5 72.6

Mar 55.1 85.8 73.7 74.4


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purchase the same quantity of oil.Take for instance crude oil imports. Brent crude oil price was

$118.46 per barrel on April 2011 when exchange rate for the rupee was Rs 44.4 to a dollar. On

November, oil price had gone down to $109.03 per barrel and exchange rate was Rs 52.7 to a

dollar. Thus, because of the rupee depreciation not much benefit can be derived out of the loweroil price.Instead, the increase in price of importing oil between April and Novemebr is to the

tune of Rs. 489.8 per barrel. (Fig 2)

Fig 2 Oil price and Exchange Rate

Source: RBI

B. Impact on Debt

A depreciating rupee is not only impacting the import bill it has also severly affected the cost of

borrowings for the corporate sector. As was reported recently1

Indian companies have borrowed

close to $29 billion in foreign currencies, through ECBs (External Commercial Borrowing) and

FCCBs (Foreign Currency Convertible Bonds), since the beginning of this year, The corporates

had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to

save costs arising out of higher interest rates and liquidity constraints within the country, but the

subsequent fall in the rupee value has negated the benefits. The report suggested that a sharp fallof about 17 per cent in the value of rupee from near Rs 44-level against the US dollar at the start

of 2011 to below Rs 51-level currently has made the cost of repaying these foreign loans costlier

by a similar margin.

1http://www.livemint.com/2011/11/20151513/Rupee-fall-may-make-India-firm.html


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For instance an Indian company would now need to pay an amount of about Rs 5,134 crore

(based on current rupee value of Rs 51.34 per US dollar) towards the principal amount to a

bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400

crore at the beginning of 2010.

The falling value of rupee may make the foreign loans availed by the Indian companies this year

costlier by an estimated over Rs 25,000 crore (about $five billion), if the current currency

valuations persist.

External Debt Scenario

As per the latest data made available by RBI, Indias external debt, as at the end-June 2011, was

placed at US$ 317.0 billion recording an increase of US$ 10.5 billion or 3.4 per cent over the

end-March 2011 level primarily on account of increase in commercial borrowings, short-term

trade credits and NRI deposits.

The external commercial borrowings and short term trade credits accounted for 70 per cent of the

rise in total external debt over the quarter broadly reflecting the surge in imports. NRI deposits

and multilateral borrowings accounted for about 20 per cent of the increase in total external debt

(Figure 3).These are certain payments for which funds need to be kept at hand always.

Fig 3 External Debt Outstanding US $ Billion

Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*


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Government (Sovereign) external debt stood at US$ 78.7 billion as at end-June 2011 as against

US$ 67.1 billion as at end-March 2010. The share of Government external debt in the total

external debt at 24.8 per cent at end-June 2011 declined marginally over end - March 2011 (25.5

per cent). On the other hand, the share of non-Government debt in total external debt rose duringthe quarter to 75.2 per cent from 74.5 per cent (Figure 4).Therefore what this could mean is that

maybe Indian corporates might have gone in for cheaper loans from foreign avenues which now

would have become expensive owing to the depreciating rupee.

Fig 4 Government and Non-Government External Debt inpercentage


Another key element to be noticed in the external debt picture of India is the exposure of debt in

terms of various currencies. The data suggests that the US Dollar denominated debt continued to

be the largest with a share of 54.2 per cent in the total external debt as at end-June 2011. The

share of Indian rupee in the total external debt stock accounted for 19.2 per cent as at end-June

2011 followed by Japanese Yen (11.1 per cent), the share of Euro accounted for3.7 per cent as at

end-June 2011 (Figure 5).Now here again the depreciation of rupee is bound to increase the

interest payments as indicated earlier that since April until November 2011 there has been an

16.54 per cent depreciation.


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Fig 5 Currency Composition of External Debt inpercentages


As indicated in the table below (Table 1) unlike the case is with China where they have foreign

reserves to the tune of 3 trillion dollars the foreign reserves in Indias case were just about

equivalent to the external debt at the end of June 2011 period.

Table 1: Indias External Debt and the ratio of Foreign Reserves to the Total External Debt

External Debts (US $Billion)

Ratio of foreign Exchangereserve to total External Debts

2007-08 224.4 138

2008-09 224.5 112.2

2009-10 261 106.9

2010-11PR 306.5 99.5

end-June 2011P 316.9 99.6Source: RBI Monthly Bulletin November 2011, Indias External Debt:Trend, Policy Changes and Cross-countryComparison*


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I. Effect of a Depreciating Rupee

Finally to somewhat understand the effect of depreciating currency on the external debt figures

Table 2 has been tabulated taking an assumption that figures for various heads as given in theend of June 2011 period were the same for November 2011 and shows what shall be the effect on

each parameter due to the depreciating rupee. Therefore we can see that the depreciating rupee

has had the serious effects upon the external debt figures of the nation.

Table 2: Effect of Depreciating Rupee on the External Debt Composition of India (inRupees Billion)

Total External DebtEnd June-2011 End Nov-2011 Change

Government Debt 3525.7 4068.7 543.0

Non-Government Debt 10672.5 12316.2 1643.8

Total External Debt 14198.2 16384.9 2186.8

Currency Composition of Debt

US Dollar 7695.4 8880.6 1185.2

SDR 1348.8 1556.6 207.7

Indian Rupee -------- -------- ---------

Japanese Yen 1576.0 1818.7 242.7

Euro 525.3 606.2 80.9

Pound Sterling 241.4 278.5 37.2

Impact of a depreciating rupee:

Total external debt has increased by Rs. 2186.8 billion for the period June 2011

to November 2011.

The currency composition for major currencies has also had an impact due to

this depreciation. The debt in U.S dollars has increased by Rs. 1185.2 billion,

that in Japanese Yen has increased by Rs. 242.7 billion.

In terms of the three major components of external debt the changes in External

Commercial Borrowings, NRI Deposits and Short term Debts have been Rs.

643.2, 365.0 and 472.5 Billion respectively.


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Others 85.2 98.3 13.1

Sum of Currency Composition of Debt 14198.2 16384.9 2186.8

Components of External Debt

External Commercial Borrowings 4176.3 4819.5 643.2NRI Deposits 2369.8 2734.8 365.0

Short-Term Debt 3067.6 3540.1 472.5

Key Components of External Debt 9613.7 11094.4 1480.7June Exchange Rate taken as 44.4November Exchange Rate taken as 51.7

II.Why is the Rupee Falling

Moving on, let us try and understand as to how the crises in the U.S. and European region might

also be leading to this heavy depreciation in rupee. We shall try and do so by looking at the

trends in Net FIIs. In the light of uncertainty and fall in global stock market, foreign

institutional investors are supposed to be pulling out their money from various EMEs (Emerging

Market Economies) and taking them back to their home countries in order to sustain themselves.

As can be seen from the figures below since April barring the month of September we can see

that whenever there has been a fall in the Net FIIs the exchange rate has depreciated

considerably. (Fig 6)

Fig 6 Net FII and Exchange Rate

Source: SEBI


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Table:3Trends in FII and Exchange Flow

Net FII Exchange Rate

Apr 7196.1 44.4

May -4276.0 45.0

Jun 4883.3 44.8

Jul 10652.9 44.4

Aug -7902.5 45.5

Sep -1865.7 47.6

Source: SEBI

III.Comparative Exchange Rate movements in EMEs

To understand whether this phenomenon of depreciating rupee is a standalone case for India the

study has tries to look at the currency trends of six other nations vis--vis the U.S dollar. The

countries considered were China, Brazil, South Africa, India, Mexico and Russia. The trend

seems to suggest that almost all the nations have seen their currencies depreciating since May

2011 barring China which has shown currency appreciation in the given period. (Fig 7) Assuggested by the trend lines amongst the nations considered South Africa has seen the highest

level of currency depreciation, followed by India. (Table 4) Thus there is reason to believe that

the crisis prevalent in the west is affecting almost all major economies worldwide.

Key Observation

Indian financial market index (BSE index)

indicates a declining trend from April 2011 to

November 2011. The falling index is partially an

indication that FIIs are selling out, this would

further increase the pressure on rupees.

BSE Index

Bse Index

Apr 19,463.11May 19,224.05

Jun 18,527.12

Jul 18,974.96

Aug 18,352.23

Sep 16,963.67

Oct 16,255.97

Nov 15,822.28Source: SEBI


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Fig 7 Comparative Exchange Rate movements in EMEs vis--vis U.S Dollar

Appreciated by 2.67 per cent


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Table 4: Exchange rates of Nations vis--vis U.S DollarBrazilReal

MexicanPeso

South AfricaRand

RussianRuble

ChinaYuan

IndianRupees

Apr 1.59 11.72 6.73 28.06 6.53 44.4

May 1.61 11.66 6.86 27.92 6.50 45.0

Jun 1.59 11.81 6.79 27.98 6.48 44.8

Jul 1.56 11.67 6.79 27.91 6.46 44.4

Aug 1.60 12.24 7.09 28.81 6.41 45.5

Sep 1.74 13.04 7.56 30.73 6.39 47.6

Oct 1.77 13.45 7.97 31.25 6.37 49.3

Nov 1.78 13.67 8.19 30.83 6.36 51.7Source: http://www.exchangerate.com/past_rates_entry.html

IV.Should RBI Intervene ?

The persistent decline in rupee is a cause of concern. Also there have been of lately suggestions

made that, some intervention from the Reserve Bank could become a critical stabilising factor.

Indeed, Reserve Bank had earlier intervened at times when the rupee was appreciating to protect

the interests of Indian exports. So, the demand is why not when the rupee is depreciating.

However looking at all the above factors the magnitude of external debt, the currency

composition of the debt as well as the continuous depreciation of the rupee makes one wonder


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whether the RBI should put extra burden on its existing foreign reserves on order to check this

exchange rate fluctuation.

V. Suggestions What the authorities can do, other than direct intervention

Oil import demand could be staggered and purchases co-ordinated so

that at no point there is undue bundling of imports.

The government can take initiatives which encourage and increase the

flow of foreign investments into India. Three recent steps taken by the

government be it the pension fund FDI limit or the increase in the

investment limit investors in government security and corporate bonds

are the steps in the right direction.

The government can make investments attractive and invites long term

FDI debt funds in infrastructure sector.

Government can consider temporary import compression.

FDI in the aviation industry, retail can also attract foreign investors.

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Assocham Exchange Rate Study