A PROJECT REPORT ON

FALLING RUPEE ()

SUBMITTEDTO THE UNIVERSITY OF MUMBAIAS A PARTIAL REQUIREMENT FOR COMPLETING THE DEGREE OF M.COM (BANKING AND FINANCE) SEMESTER ISUBJECT: ECONOMICS OF GLOBAL TRADE & FINANCESUBMITTED BY: PILLAI ANUJA SURESHROLL NO.: 42

UNDER THE GUIDANCE OFMRS. RAJAM RAJAGOPALAN SIES COLLEGE OF COMMERCE AND ECONOMICS,PLOT NO. 71/72, SION MATUNGA ESTATET.V. CHIDAMBARAM MARG,SION (EAST), MUMBAI 400022.

CERTIFICATEThis is to certify that _____________________________________________________________________________________________of M.Com (Banking and Finance) Semester I (academic year 2013-201) has successfully completed the project on ______________________________________________________under the Guidance of Mrs. __________________________________________.

_________________ ___________________ (Project Guide) (Course Co-ordinator)

___________________ ___________________ (External Examiner) (Principal)Place: _____________ Date: ___________

DECLARATION

I, __________________________________________________Student M.Com (Banking and Finance) Semester I (academic year 2013-2014) hereby declare that, I have completed the project on ______________________________________________________________.The information presented in this project is true and original to the best of my knowledge.

___________________PILLAI ANUJA SURESH Roll No.: 42

Place: _____________Date:_____________

ACKNOWLEDGEMENT

I would like to thank the University of Mumbai, for introducing M.Com( Banking and Finance) course, thereby giving its students a platform to be abreast with changing business scenario, with the help of theory as a base and practical as a solution.I am indebted to the reviewer of the project Mrs.Rajam Rajagopalan,my project guide for her support and guidance. I would sincerely like to thank her for all her efforts.Last but not the least; I would like to thank my parents for giving the best education and for their support and contribution without which this project would not have been possible.

______________________ PILLAI ANUJA SURESH ROLL NO.42

TABLE OF CONTENTSSr.NoContentsPg.No

1Introduction6-

(a) Overview6

(b) Rationale8

(c) Objective8

(d) Chapterization8

2Life line of rupee9

3How Rupee has moved against dollar12

4Causes of Rupee fall14

5Impact of Rupee fall19

6Belated steps taken by authorities21

7Policy options for India22

8RBI and ailing rupee24

9New prescriptions for ailing rupee28

10Conclusion30

11References32

OVERVIEW

We invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own.- lionell trilling, american literary criticThe most concerning chapter for India during last two years and specifically last two months is the weakening of rupee against dollar. It is not only that rupee has lost its value in the global context but also dollar has improved its performance in the global trading markets. The outstanding performance of US equities and the improvement in the labor market has made Americans more optimistic about the US economy, thereby stimulating greater hopes of QE(Quantitative Easing) tapering.The government of India is still unable to generate heavy capital inflows.If US Federal Reserve withdraws its bond buying programme; there will be unexpected outward flow of money leaving India clambering for dollars. The slowdown in the Indian economy has made the situation more fickle.The government has a strong role in controlling currency in the form of policy regulation and reforms. The current UPA leadership has failed to strike with some heavy reform to generate more cash inflows. As a result the government has gradually lost its control over rupee depreciation. Investors sentiment plays a pivotal role over hereOil and gold imports account for 35 per cent and 11 per cent of Indias trade bill respectively.There has been an uninterrupted demand for the dollar from the oil importers pushing the rupee lower. Likewise the falling gold prices have made the central bank to reduce imports, which increases CAD and hits the currency directly. Indian economy requires a strong structural reform to maintain a positive balance of payment.Also, government spends excessively as election approaches just to woo electorate votes. This causes the rupee to depreciate. Then the government beats around the bush to control the currency behaviour. Most of the times these measures worsen the economic crisis to a great extent.The foreign institutional investors have been selling index futures and Indian equity market is weakening. As a result there is a heavy demand for dollar and Indian currency as well as economic situation is looking too gloomy.These worries, combined with a record high current account deficit and now uncertainty over the central banks monetary policy stance, have prompted foreign investors to sell more than $12 billion of Indian debt and equities since late May.Reserve Bank of India has taken certain steps and some more to be followed to have a control over rupee.But the Question comes here, What are the implication? Is it that bad overall?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. 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.A sharply declining rupee triggers inflation, broaden the current account deficit, hits investor sentiment and creates burdens for organization with high exposure to foreign debt. The government and the Reserve Bank of India have taken several reform initiatives to resist the downturn, but their success stories are looking gloomy.Buying imported materials will become very costly. A weak rupee will create extra stress on Oil Marketing Companies (OMC) and this will surely be passed on to the consumers as the companies are allowed to do so after the deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will trigger inflation.If the depreciation is steep and without control, it will strike up inflation. As a result the Central bank would have very less room to impose further rate cut and thats the burden the borrower would have to bear.Indians who have gone to abroad for tours or studies are highly affected in these times. The only smiling people in this context are the NRIs who gain more on sending money to their homeland.As a whole we can say that though weakening rupee is the reason for someones smile it is a real threat for the countrys overall fiscal health and increase the current account deficit heavily. But in my opinion this huge downgrade is a temporary phenomenon and the rupee is really oversold. Now the Central bank and Government should work hand in hand and find out the policy measures to stabilize the frightening scenario. I personally hope a further cut in SLR to ease the liquidity to save rupee and also import duty hike in gold and other related materials. RBI can buy bonds to ease liquidity in the market. Finally we can say that the situation is tight and challenging for us, but we can not only hope for the best but also should contribute the most to get back Indian economy in the driving seat.RATIONALEThe purpose of undertaking this project is to understand as to why the rupee has been the worst performer in Asia since late May 2013, when the US Federal Reserve first signaled that it may begin tapering its monetary stimulus this year, sparking an exodus of cheap money from emerging markets worldwide.

OBJECTIVEThe Main objective of this Project is to analyse and incur as to how and which factors are contributing in ailing the Rupee value. Thereby it also aims at discussing and bringing out various solutions for Ailing Rupee. It also intends to bring to the Note about the current and new RBI governor Raghu ram rajans entry at this stage of crisis and what actions he plans to adopt will also be shortly discussed.

CHAPTERIZATIONThe first part of the project takes back to the performance of rupee against dollar in the past.Then it concentrates on the current scenario thereby explaining its causes and impacts. It also lays out various startegies adopted by authorities to curb the fall which unfortunately couldnt do well.The second part then deals With RBI, New governor and New prescriptions for ailing rupee thereby listing the impacts of the measures to be takenThis project then ends with a conclusion.

LIFELINE OF RUPEEYesteryear humanist Mehamood was morethan symbolic when he crooned Na biwi na bachcha na baap buda na maiyya/ the whole thing is that ki sabse bada Ruppaiya in the 1976 movie sabse bada rupaiyaThe movie released a few years after a politically controversial move to devalue the rupee in the mid-60s, mirrored the inescable importance of the currency note in Indias socio economic milieuIndias currency history is a spectacular continuum since the ancient ages to the current rough and tumble of a globalized economy, with each eras coinage, and worth, broadly imitating the prevailing political, social and economic environmentEARLY DAYSPunch marked coins of the 6th-7th century are believed to be the first documented use of currency in India- called thus because of the peculiar technique to make them by thumping bear symbols into silver planes.The Ruppaiya whish has evolved into the modern day rupee, was first introduced as a silver coin for transaction by emperor Sher shah Suri, Who built the grand trunk road in the 16th century.It also perhaps , hold out lessons on the role of currency and household savings in raising public resources to build massive projects.Thrifty households could well turn out to the primary financiers of highways and ports if Indias savings sustains at high levels, primarily due to its armies of young people entering workforce.POST INDEPENDENCEIn 1947, One could change a Rupee-Worth a US dollar then-into 16 annas, but in value, this was no loose change. Those days for an anna you could buy a kilo of Ghee, now priced anywhere between Rs.300 and Rs.400-a nearly 2000 fold jump.Indias exchange rate has developed from a fixed regime where the government and RBI determined the rupees value-similar to what China does for its yaun against the dollar-to a market ruled system determined by the laws of demand and supply, pretty much like other commodities.Between 1947-1971, India followed a par value system where the rupees value was fixed at 4.15 grains of fine gold. The currencys devaluation in june 1966 reduced the par value of rupee to 1.83 grains of fine gold.DEVALUATIONIn 1966, the Government announced its first major intervention in the foreign exchange market announcing rupees devaluation by 37.5% ( from rs.4.75 the dollar became expensive to rs.7.50 in one single stroke).A devalued or depreciated currency boosts exporters earnings in rupee terms. For every dollar, devalued currency gives them more in rupees terms. This encourages them to slash prices for their goods in the world market making them more competitive than global peers.Two wars- with china in 1962 and with Pakistan in 1965- had crippled the Indian economy. The broad objective of devaluing the rupee was to raise export earnings, liberalise imports and boost Indias chances of securing more foreign aid, underlying the importance of currency administration as a policy tool.According to John P Lewis who was the head of the USAID (united states agency for international development) mission to India in the mid 60s: Devaluation was not aid in itself. Devaluation was an instrument ;it was essential if freeing the market was to work. Whether formally or de facto, it had to come sooner or later, and in purely economic terms; it made sense to get on with it.25yrs later, buffeted by a precarious BOP crisis, Manmohan singh, who was the Finance minister between 1991 and 1996, again devalued the rupee in 1992 to encourage exports and earn precious dollars. The rupees value fell sharply from just over rs.25 to a dollar to near rs.32 to a dollar.That was the last time India has used devaluation as an economic policy instrument. India has since moved on to a fully market determined exchange rate regime. Trans continental capital movements decided by the click of a jumpy computer mouse play a key role in deciding the worth of the rupee, which only three year ago joined the elite club of symbol endowed national currencies that include the dollar, the pound, the euro and the yen.PAIN AHEAD The rupee has had a sharp fall since May 2013 and is menacingly threatening to canter past Rs.70 to a dollar. If the countrys top economy managers have gone into a huddle after the currencys recent slide, it is only symptomatic of the anxiety inflicting Indias broader economy.Ever since the world recovered from the doctom bust and found a new mantra-emerging markets foreign investments, both direct direct and financial, has been chasing on Indias story that deliver returns in igh double digits a year. The tide has since turned, bringing the rupee and other emerging markets, currencies down.Analyst warned of more pain ahead as the world settles down to a new normal state of economy.Taming Inflation or the currency(as in the case currently) may require policies that result in increasing the economic misery for people in the near term. Unfortunately, we see no short cuts claims Sonal varma, economist at Nomura.Eventually, funds will return to India and its peers, for these will remain the island of global growth. As Herbert stein, a former economic adviser to US president Richard Nixon and Gerald ford had presciently observed If something cannot go on forever, it will stop. Indias policy makers, and its people, will only be hoping the steins rule prove true for halting the rupees free fall.

BOX 1Exchange rate? Whats that?Like any commodity, the exchange rate or price of a commodity is determined by the laws of Demand and SupplyStronger demand for the currency pushes its price up and vice versa.An exchange rate of Rs.65 to a dollar simply means that the value of one dollar is equivalent to Rs.65

BOX 2Currency Devaluation/Depreciation??If a currency is depreciating, his implies that its value has fallen in relation to another currency. In the current context, the value of the rupee has fallen or depreciated from about rs.55 against the dollar to about rs.65,over few months.Banks, Brokers, Individuals and Government trade in currenciesThat explains the daily fluctuation in currency prices.

HOW RUPEE HAS MOVED AGAINST DOLLAR1=$1(1947)-India gains independence.6.35 (1966)-Government devalues rupee to encourage exports.7.67 (1973)-Oil crisis breaks out; Government enacts FERA to clamp down on illegal forex transactions8.41 (1975)- Government inposes political emergency.12.36 (1985)- Rajiv Gandhi government launches first stirrings of liberalization through long term fiscal policy22.63 (1991)- India mortages gold to wriggle out of a BOP crisis. Also, Finance minister Manmohan singh dismantles the Industrial licensing regime in a budget that marks te beginning of Indias economic reforms.25.92 (1992)- Government sets up SEBI to regulate stock market in the wake of Harshad Mehta securities scam.31.44 (1993)-India moves to a full market determined exchange rate system after merging the dual rates of the transitional liberalized exchange rate management system (LERMS) introduced by RBI earlier.35.43 (1996)- Import licensing is abolished and tariffs brought down substantially36.32 *(1997)- Finance minister P Chidambaram presents Dream budget bringing down tax rates 41.27 (1998)-The Asian currency crisis hits;the rupee sinks to a new low.48.60 (2002)- The prevention of money laundering act (PMLA),2002, is enacted, forming the core of the legal framework to combat illicit monetary transactions across the country. 45.32 (2004)- UPA government with Manmohan singh as PM comes to power.43.31 (2006)- Indias growth rate hits a record of 9.8% on the back of high domestic and global demand.43.50 (2008)- Wall street icon Lehman Brothers collapses, pushing the world economy into its worst crisis in eight decades.48.40 (2009)- UPA government returns to power53.32 (2012)- Government announces retrospective taxation of corporate deals, spooking investors.Rupee canters past 55, touching 57.P.Chidambaram returns as Finance minister; shepherds in a string of reformist moves, including plans to push india to the path of fiscal consolidation. NOW:US Federal reserve chief Ben Bernanke hints at withdrawing cheap money policy amid signs of recovery in the US.The rupee plunges to a new low, breaching 65 to a dollar despite a slew of measures including forex controls on individuals and companiesThe government appoints Raghuram Rajan as governor of the RBI.

BOX 3Why is the rupee falling-US Federal connection??The US federal reserve has hinted at winding down the programme to pump in billion of dollars, amid signs of recovery in the US.Part of this money came in to Indian equities.Portfolio investors are now withdrawing money from emerging markets, causing the demand for dollars to rise, pulling down local currencies.

CAUSES OF RUPEE FALLThe Indian Rupee has depreciated to an all time low with respect to the US Dollar. On 28th August 2013, the Indian rupee had gone down to 68.825 against the Dollar but the situation was somewhat revived by the Reserve Bank of India that decided to open a special window for helping state owned oil companies Indian Oil Corp Ltd., Bharat Petroleum Corp and Hindustan Petroleum Corp.The beneficiaries will be able to buy dollars through this window till further notice is provided. These companies, together, require about 8.5 billion dollars every month to import oil and it is expected that this will help them meet the requirements. This has had an immediate effect as is evident from the fact that the INR has started at 67 against the USD at the early proceedings in the Interbank Foreign Exchange Market. The question, however, is why this is happening. There are several reasons that can be enumerated in such a scenario.WHAT BASIC LAW OF ECONOMICS SAY??As per the rudimentary laws of economics if the demand for USD in India exceeds its supply then its worth will go up and that of the INR will come down in that respect. It may be that importers are the major entities who are in need of the dollar for making their payments. Another possibility here could be that the Foreign Institutional Investors are withdrawing their investments in the country and taking them elsewhere.This can create a shortfall in supply of the dollar in India. In fact, of late, the FIIs have been heading to greener pastures like Singapore owing to the greater operational efficiency and lesser bureaucratic problems that have unsettled the Indian business fraternity and hampered its overall economic growth.This situation can only be addressed by exporters who can bring in dollars in the system. If somehow the FIIs can be wooed back, then this imbalance can also be addressed to a certain extent. GOING FOR GOLDGold is a physical asset and has been a traditional favourite for parking surplus income. Gold is considered to be a safe harvest asset. In times of high inflation and volatile stock markets, gold prices usually tend to go up. It becomes costlier in rupee terms as the US dollar turns expensive. High gold consumption ahead of the festival and wedding season could see a rise in purchases despite recent import curbs, further pushing down the rupee.

EUROPEAN RECOVERYThere are signs of recovery in Europe after years of recession. Higher consumer spending in major European economies such as Germany will nudge companies to expand capacities. Additional production lines in factories to meet greater demand or purchases will push up energy consumption in Europe. This will lead to higher crude oil demand. This, coupled with the Syrian crisis could push up oil prices further. For India, the import bill could get even wider and could push down the rupee further.0.2% estimated growth in euro zone during april-june, making an end to recession.

US MONETARY EASINGThe US federal reserve is printing extra dollar to pump in $85 billion every month to boost spending and investment and help the economy turnaround. Part of this money came into emerging markets including India. In may, Fed resereve chief Ben Bernanke signaled winding down the stimulus amid recovery signs. This has prompted foreign portfolio investors to withdrawing money from India and other emerging markets. The resultant rise in dollar demand has pulled the rupee down to record lows $85 billion, US federal reserve has been injecting monthly into the system.

Since the beginning of QE program, much of the money has leaked into emerging markets offering higher yields and better growth prospects. The emerging markets have been the biggest beneficiaries of Feds loose monetary policy, which has pumped extra liquidity since the global financial crisis of 2008. According to the IMF, emerging markets received nearly $4 trillion in capital flows from 2009 to early this year.The investors borrowed cheap short-term money in the US and invested in higher yielding assets in India, Indonesia, South Africa and other emerging markets. This resulted in more money flowing into debt, equity and commodity markets in these countries. In India, many companies resorted to heavy borrowings overseas. The massive capital inflows also enabled India to comfortably finance its trade and current account deficits rather than addressing the structural aspects of CAD. However, this money will quickly leave India and other emerging markets when the tapering of QE program begins. Already, emerging markets are witnessing a huge outflow of dollars as investors have started pulling money out of bond and equity markets. The foreign investors pulled out a record Rs.620 bn ($10 bn) from the Indian debt and equity markets during June-July 2013. If the Federal Reserve decides to taper the QE program, the liquidity withdrawal would continue to put pressure on the rupee over the next 12 to 18 months. SYRIAN CRISISA possible millitary intervention by the US in Syria has sparked off fear that a war would break out in the oil rich asset area. This has pushed up oil prices fuelling a rebound in US dollar as investors flocked towards the dollars safety. India imports nearly 2/3rd of its crude oil requirements and global oil prices is bad news as it will push up the oil import bill and consequent higher dollar demand would further impact the rupee $117 per barrel, the price of crude as on 25/08/2013, highest in 6 months

BILLING THE CADThe rupees fall is symptomatic of a wider Current account deficit(CAD) or the difference between dollar inflows and outflow. In 2012-13 Indias CAD had touched an all time high of $88 billion or a record 4.8% of GDP. Foreign porfolios investors are waiting for cues on the calendar for rolling back the monetary stimulus. A spurt of dollar outflow could make india to rein in the CAD. A wider CAD carries the risk of weakening the rupee further. VOLATILE STOCK MARKETWhen the economy is performing well and the stock market is performing better than other countries, overseas investors will become heavy investors here. It is a known fact that Indian stock market is dominated by overseas investors. To invest here, they need rupee. This will increase the demand for rupee and will result in higher value for rupee. On the other hand, when these investors are pulling money out of Indian stock market, rupee will be depreciated. Indian market is in a bad shape for the last 2 years. The sentiments after the US downgrade and the European crisis etc. resulted in overseas investors selling rupee,buying dollars and rupee depreciation. In a bad performing market, when there is depreciation in rupee, it will bring down the overseas investors real returns. So they will start selling, which will again worsen the situation. The dollar is still the safest paper currency in the world! So, there is more demand for dollar in volatile condition like this. This will add to the rupee depreciation. THE ROLE OF OFF SHORE NDF MARKETAmidst all these developments, the critical role played by the offshore non-delivery forward (NDF) market in determining the value of rupee should not be overlooked. The rupee NDF market has mushroomed in key global financial centers with the liberalization of trade and capital flows since the 1990s. NDFs are over-the-counter (OTC) derivatives instruments for trading in non-convertible currencies such as the Indian rupee and the Korean won. The contracts are called non-deliverable since no delivery of the underlying currency takes place on maturity. The counterparties settle the contracts on maturity by paying the difference between the spot rate (decided by the RBI) and NDF rate, usually in US dollars. Since NDFs are the OTC derivatives, the actual size of the market is not known but various surveys suggest that the trading volumes in the NDF markets are larger than the onshore markets. According to a study by the Bank for International Settlements (BIS), the daily turnover in offshore rupee NDF market was $10.8 bn in 2010, nearly 52 percent of the total turnover ($20.8 bn) in foreign exchange forwards and forex swaps. The NDF market for the rupee is mainly concentrated in Singapore, Hong Kong, Dubai, London and New York. In recent years, London has become a key centre for trading in the rupee NDFs. According to FXJSC Semi-Annual FX Turnover Surveys, the average daily trading in rupee NDFs in London increased from $1.5 bn in 2008 to $5.2 bn in 2012, a jump of 250 percent. Being an offshore market, the Indian authorities have no powers to enforce regulations on it. The domestic banks and companies are not allowed to transact in the NDF markets. The main participants in the rupee NDF market consist of commercial and investment banks, hedge funds, currency speculators, international subsidiaries of Indian companies and big diamond merchants. Although the NDF market is primarily meant to provide a platform to companies to hedge their foreign exchange risk and related exposures, the dominant players in this market are the speculators (who bet on the movement of the rupee) and arbitrageurs (who exploit the price differentials between offshore and onshore markets). GROWING INFLUENCE OF NDF MARKETBeing a 247 market, the offshore NDF market exerts considerable pressure on onshore currency markets, particularly when the market sentiment is fragile for the rupee. Before Indian markets open for trading, the NDF markets in Hong Kong and Singapore set the price movement of the rupee. A bearish or bullish trend in the NDF market set the tone for trading in the domestic rupee market. An empirical study by a RBI staff member found that there are volatility spillovers from NDF market to spot and forward markets in India. The study also found that the magnitude of volatility spillover from NDF to spot and forward markets has become higher after currency futures were introduced in India in 2008. This is probably due to large arbitrage taking place between futures and NDF market, says the study.In its latest Annual Report (2012-13), the RBI has acknowledged that there is a long-term relationship between the spot and NDF markets for the rupee. During the period of depreciation, shocks originating in the NDF market may carry more information, which gets reflected in on-shore segments of the market through mean and volatility spillovers, states the Report. FOREIGN BANKS PLAYING THE ARBITAGE GAMESince foreign banks and institutional investors are present in both onshore and offshore markets, they profit from huge arbitrage opportunities using the prevailing negative sentiments in the market. Such entities buy dollar-rupee forwards in onshore market and sell forwards in offshore NDF market. According to India Forex Advisors (a foreign exchange consulting and treasury management firm), a large demand for forward dollar pushes up forward rate and thereby influences the spot exchange rate in India. As witnessed during July-August 2013, the increased speculative trading in the NDF market exacerbated volatility in both the spot and the forward market in India.Primarily six foreign banks (namely Citibank, HSBC, Deutsche Bank, UBS, J P Morgan, and Standard Chartered Bank) are the key players arbitraging between the rupee NDF market and domestic markets. Besides, a few international subsidiaries of big Indian corporations and some diamond merchants are also engaged in arbitrage practice.

INDIA NOT WORST HITIts not in India alone where stocks and currencies have contracted a global flu after investors began flocking to safer locations such as the US ever since Federal reserve chief hinted about rolling back th quantative easing policy to aid recovery in the worlds largest economy.

IMPACT FUELLING INFLATIONOur transport bill could go up further. A weak rupee has widened oil firms crude import bill sharply over the last few months. This will eventually force them to raise retail fuel prices to cover for potential revenue losses. Thus costlier transport fuel will knock up prices and stoke inflation. SOVEREIGN DOWNGRADEIndia has been the target of unsparing criticism by credit rating agencies for its precarious public finances. Ratings agency standard & poor cautioned that India faces a rocky road ahead a high CAD, Low rupee and a high fiscal deficit can raise the chance of a downgrade of Indias sovereign ratings spooking investors and currency and equity markets.5% is Indias GDP growth in 2012-13, the slowest in a decade.

INTEREST RATESThe RBI had been forced to raise banks borrowing costs to curb liquidity in the system. The central bank wants to discourage banks lendable resources being used for taking speculative positions on the rupee. But costly funds for banks could force lenders to raise rates for final consumers. Already, many banks have raised rates. This could keep your EMIs high. FOREX RESERVESIndias forex reserves can fund just about 7 months of imports. The possibility of import payment default may be still far away, but lower reserves will limit the RBIs ability to prop up the rupee by selling dollar outflow , in wake of the rolling back of the US stimulus Package, can also deplete the reserve. INFLATION GRAPH AND FISCAL DEFICIT TO SCALE UPCurrently, India is suffering from a near two digit inflationary pressure. A depreciating rupee would only add fuel to this. It would lead to high inflation, as India imports around 70 per cent of its crude oil requirement and the government would have to pay more for it in rupee terms. Due to the control on oil prices, the government may not easily pass the increased prices to the consumers. Further, this higher import bill will lead to rise in fiscal deficit for the government and will push the inflation.On November 21 alone, overseas funds sold more than US$500 million worth of Indian-listed shares over the five trading sessions, reducing net inflows for 2011 to under US$300 million. The rupee has lost more than 10 percent of its value this year, making it one of the worst performing currencies in Asia. In the light of uncertainty and fall in global stock market, FIIs 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.

A BLOW TO INDIAN IMPORTERSThe Indian import industry would also have to pay more in rupee terms for procuring their raw materials. This would happen despite a drop in global commodity prices, only because of a depreciating rupee against dollar. Corporate India is a net borrower of dollars and to that extent a depreciating rupee would impact its balance sheet adversely. Companies with foreign debt on their books would also be impacted. With the rupee depreciating against the dollar, these companies would need more rupees to repay their loans in dollars. This will increase their debt burden and lower their profits. Obviously, investors would do better to stay away from companies with high foreign debt.The depreciating rupee has pushed up the prices of electronic gadgets and home appliances. Car makers who import 10 to 40 percent of the components are contemplating increasing prices. This is an attempt to offset the increased import costs owing to the depreciating rupee. An increase in prices could span from Rs 10,000 for small cars to Rs 50,000 for luxury vehicles. The rising interest rates and fuel hikes have played spoilsport for the car industry that is brimming with a wide array of choice for consumers. NEGATIVE IMPACT ON INDIAN STUDENT AND TRAVELLERS ABROADIndividually, travelling abroad becomes more expensive as travel cost could go up by around 10 per cent compared to last July figures. Students studying abroad too will be hit as more rupees will go out to pay for the courses, stay and other expenses.RUPEE FALL IS A BLESSING???As reported, Policy makers are spending sleepless nights over the falling rupee, but it spells a winfall for NRI, who are racing to park their maney back home.Expatriates working in west asia are borrowing from friends and colleagues and even taking personal loans to cash in on the other side.And bankers in kerala (the state has got around 2.8 million people working abroad, most of them in gulf countries) report a 30% surge in remittances in the last 3 months.Smart people have approached their companies and sponsors to advance their salaries to make maximum use of the rupee slide

BELATED STEPS TAKEN BY AUTHORITIESDuring July-August 2013, following measures were announced by the Indian authorities to stem the depreciation of rupee and contain the current account deficit: The duties on the import of gold, silver and platinum were increased to 10 percent. The limits on foreign ownership of sensitive sectors (such as telecoms and insurance) were further liberalized. New restrictions were imposed on Indian residents seeking to send money abroad to buy property. In mid-August, the existing limits on overseas direct investments by Indian companies were substantially reduced. However, this policy was withdrawn by the new governor of RBI on September 3. The interest rates limits for deposits meant for non-resident Indians were liberalized. New restrictions on open interest on USD-INR trades were imposed. Banks have been banned from trading in domestic currency futures and the exchange-traded options market on their own. Banks can only trade on behalf of their clients. The margin requirement on the domestic dollar-rupee forward trade was increased to 100 percent of the traded amount, which means investors will have to give the entire amount of the transaction upfront. The state-owned oil marketing companies (OMCs) which buy dollars to finance their imports were asked to trade only with a single state-owned bank. It is surprising to note is that the above-mentioned policy measures failed to arrest the sliding value of the rupee in the currency markets.

POLICY OPTIONS FOR INDIASeveral episodes of financial crises in the 1990s (from Mexico to Southeast Asia) highlight the eminent role played by current account deficits in triggering a currency crisis. An economic boom fueled by short-term capital inflows and debt-driven consumption is a recipe for currency crash. Indias external sector vulnerability is a symptom of a much deeper malaise in overall development strategy and domestic policymaking. Despite the deterioration in major indicators of external sector vulnerability, the policymakers remain complacent in defending Indias growth story. There are no quick fixes to countrys imbalanced external sector and the Indian economy remains vulnerable to external shocks and global liquidity conditions.Some analysts believe that India can rely on its foreign exchange (forex) reserves of $275 bn to arrest the currency fall. But Indias short-term external debt (with a maturity of one year or less) has already reached an alarming level. According to the official statistics, Indias short-term external debt stood at $116 bn in March 2013 and the ratio of volatile capital flows (consisting of short-term debt and portfolio investments) to countrys forex reserves was as high as 96 percent. At current levels, the forex reserves can barely meet the countrys import bill for seven months. Firstly, New Delhi should take urgent policy measures to curb inessential imports. Since increasing exports may take considerable time, it is desirable to impose more curbs on gold, silver and non-essential items. In addition to higher custom duties, strict quantitative restrictions on the import of gold, silver and non-essential items should be imposed. The government should also consider imposing higher custom duties on those consumer electronics goods which are not part of Information Technology Agreement of the WTO. Indeed, such a policy regime may encourage smuggling but there are ways and means to check it.Since oil is the biggest item in its import bill, India should immediately accept Irans offer to sell crude oil entirely in rupees and at concessional terms. By accepting this offer, India could potentially save $8.5 bn in foreign exchange spending. Oil imports from Iran have declined substantially in the last five years due to unilateral sanctions imposed by the US and the European Union. Secondly, India should immediately work out modalities for trading of goods in local currencies. India could begin trading in local currencies with BRICS partners and Asian countries. Russia, Malaysia and some other countries have expressed interest in trading in local currencies with India. Thirdly, issuing dollar-denominated sovereign bonds in the midst of a crisis-like situation is a risky proposition. Besides, India will have to offer a higher rate of interest to attract investors which in turn would further increase countrys external indebtedness. Instead of approaching the IMF for a standby loan which comes with stiff conditions, India could enter into currency swap agreements with key trading partners. Recently, India and Japan expanded their bilateral currency swap facility to $50 bn. On the sidelines of the G20 Summit at St Petersburg in September 2013, BRICS countries worked out operational details of launching a $100 bn Contingent Reserve Arrangement (CRA) to ease balance of payment difficulties.Fourthly, to rein in rampant speculation and manipulative activities in the offshore NDF market, the RBI should work out arrangements with other regulatory authorities in the form of information sharing and the setting of general standards. Currently, a new regulatory framework for OTC derivatives market is under preparation following the Dodd-Frank Act in the US, the European Market Infrastructure Regulation (EMIR) in Europe and the Basel III standards. As a member of G20, India should engage in the ongoing international initiatives aimed at increasing transparency and reducing systemic risk posed by the $560 trillion global OTC derivatives market.Lastly, the Indian authorities should not hesitate to impose capital controls as a macroeconomic policy tool to protect the domestic economy from a sudden capital flight. In this regard, capital controls imposed by Malaysia and Iceland on the capital outflows are worth examining.

RBI AND THE AILING RUPEEOutgoing Reserve bank of India governor D Subbarao expressed hope that his successor Raghuram Rajan would be like Arjuna and find his way out of the Chakravyuha that the economy is in.So the question is CAN ARJUNA GET COUNTRY OUT OF CHAKRAVYUHA??Raghuram Rajan had made his intentions clear a few days before he took over as the 23rd governor of the Reserve Bank of India on September 4. On his penultimate day as chief economic adviser, the 50 yr old economist told an informal media gathering at the North block that the governors allegiance , as per the RBI act, lay with protecting the value of the rupee and curbing inflation. So, his decision to hike Repo and Reverse repo rates, Despite increasing government pressure to slash them, should have been expected. It, however, surprised analysts, stock markets, India inc and more importantly, the government.The government, led by union finance minister P.chidambaram, had been pressing for a reduction in the Interest rates to boost economic growth. Many expected Rajan to toe the government line in a stark departure from his hawkish predecessor Duvvuri Subbarao. Rajan however, showed that he has his own plans.IN HIS MAIDEN POLICY REVIEW, Rajan hiked Repo rates and Reverse Repo rates by 25 basis points to 7.5 per cent and 6.5 percent, respectively. In a bid to tighten liquidity, RBI lowered the marginal facility rate by 75 basis points to 9.5 per cent, and brought down the minimum daily maintenance of the cash reserve ratio(CRR) from 99 percent to 95 percent of the requiorement. The CRR rate remained untouched at 4%.The US federal Reserves decision to postpone the tapering off of the Quantitative easing(QE) also failed to change Rajans mind. He says, Let us remember that the postponement of tapering is only that, a postponement, a cautious Rajan said.According to me , Rajans assessment that the tapering off of QE is inevitable. A country like India which is funding its current account deficit(CAD) primarily with the help of portfolio inflow cannot afford to overlook structural factors that are driving CADWhat to expect in future??Analysis forecast that Rajan might further increase interest rates to rein in inflation . However, SREI infrastructure finance said in a statement: India needs huge investment in infrastructure and half of that is expected to come from the private sector. It is difficult to foresee how private sector will be able to mobilise resources from domestic sources inthis scenario.The society for Indian Automobile manufacturers said that: The industry had been hoping for a recovery through the ensuing festive season, anticipating an improvement in markets. But this move comes as a surprise dampener...Interestingly, Despite the pain, everyone privately, at least- agrees that rajan made the right choice, and that he is a strong and worthy successor to subbarao.In short we can quote Raghurams move as PAINFUL WISDOM

Know your Guv Raghuram rajan SCHOLARLY CREDENTIALSMassachusetts institute of technology, Ph.D.,may 1991; Thesis title:Essays on banking, IIM Ahmedabad MBA 1987, IIT delhi, btech (electrical), 1985 BOOKSFault lines:How hidden fractures still threaten the world economy and many more EMPLOYMENT Eric j.gleacher distinguished service professor of finance, graduate school of business, univ of ChicagoChief economic advisor, finance ministry,GOIEconomic advisor to PM of indiaChairman of high level committee on financial sector reforms,indiaChief economist,IMF

MULTIPLE RESPONSIBILITIES OF RBIRBI, unlike its peers, has many critical duties: MONETARY AUTHORITY- It formulates and implements the monetary policy, mainltains price stability and credit to productive sectors BANKING REGULATOR- It is the main financial sector watchdog tasked with the duty to protect depositors interest CURRENCY ADMINISTRATOR-It prints money with the primary objective to give the public adequate quantity of supplies of notes and coins FOREX MANAGEMENT- It has the responsibility to facilitate external trade and payment and also prevent volatility in the forex market GOVERNMENTS BANKER- It performs merchant banking functions for the central and the state governments; also acts as their banker

RAJANS TRILEMMA

STABILISING RUPEE-20% fall in rupees value since may 2013. More liquidity tighteningmeasures can choke growth by companies borrowing costs TAMING INFLATION-9.6% Indias retail inflation in july 2013. A depreciating rupee has made imported goods costlier, but raising interest rates to cool prices will hurt investment. BOOSTING GROWTH-4.4% Indias real GDP growth during April-june 2013. High lending costs have forced companies to defer investment. But a rate cutcan weaken the rupeeas also push up inflation.

RATE RULES Cash reserve ratio(CRR):Proportion of deposits banks have to park with RBI REPO RATE:Rate at which RBI lends to bank REVERSE REPO RATE:Rate at which RBI sucks cash from the system by borrowing from banks. STATUTARY LIQUIDITY RATIO:Minimum proportion of deposits banks are have to maintain in the form of gold, cash or governments bonds.

Whos Exposed to the risk of a sudden stop of easy money from US??MOST EXPOSED: Brazil, Mexico, South Africa, Turkey, UkraineBODERLINE: Argentina, Hungary, Indonesia and PolandMODERATELY EXPOSED: Chile, Columbia, Czech republic, India, Korea, Malaysia, ThailandLEAST EXPOSED: China, Israel, Peru and Russia

NEW PRESCRIPTION FOR THE AILING RUPEERUPEE SUPPORTMEASURES IMPACT

RBI will swap dollars raised by banks under longterm deposits at fixed rate of 3.5% Will encourage banks to raise dollars overseas without currency risk

Banks overseas borrowings limit doubled to 100% of Tier 1 capital; RBI to swap dollars at 100 bps discount Banks will bring in more dollars as cost of hedging comes down

Bank provisions for cash reserve ratio and statutory liquidity ratio to be cut RBI may ease liquidity in forthcoming monetary policy

BANKING LICENSE Ex guv Bimal jalan to head panel to screen applications for bank licenses, new licenses before end january Removes uncertainity of delay due to elections

Liberalized branch licensing for banks which meet rural obligations Increase availability of banks in rural areas

Roadmap for freeing the entry of new private banks and allowing different types of banks More competition in banking

More leeway for foreign banks coupled with more regulation and supervisory control Strengthening of financial system

MARKET CONFIDENCE Cap on a companys overseas buy at 100% of its net worth relaxed Companies can freely acquire businesses upto 400% of their net worth if funding through ECB

Limit for Rebooking cancelled forward exchange contract doubled to 50% for exporters Almed at inspiring confidence, greater risk management flexibility for exporters

Importers to be allowed to rebook cancelled forward contracts upto 25% Will enable better risk management

BANKING REFORMS Panel headed by deputy guv Urjit patel to review monetary policy frame work RBI may drop mid quarter review for consistency

RBI director Nachiket Mor to look into direct lending requirement under priority sector norms Improved efficiency in ending

Liberalization of markets and allowing speculation Seen to be hinting at removal of restriction on banks faking position in currency futures

Aadhar to be used for collating an individuals credit history Improved credit for individuals

FINANCIAL INFRASTRUCTURE Electronic bill factoring exchange for MSMEs where bills against corporates can be auctioned More credit options for MSMEs

Deputy guv Anand sinha and Guv to look at speeding up of working of debt recovery tribunals and asset reconstruction companies Speedy resolution of Bad loans

Deputy guv KC chakrabarty to review NPAs central registry to record loans by large corporates across banks Reduce risks from large accounts going bad

White label Pos(card swipe) machines and mini ATMs to be allowed Increased penetration of electronic payments

At a time when every surprise from RBI has been unpleasant one, new governor Rajan sought to assuage markets with his action list for the next 6 months. The time frame for these measures is not years but months and weeks in some cases Rajan said

CONCLUSIONThe rupee's recent decline might appear sudden but it hasn't really come as a surprise to keen observers. This crisis has been building up for a long time. For years, successive governments have relied on capital inflows to balance the CAD and support the rupee. In the past, fortunately, the capital has come in. During 2003-08, capital inflows averaging $45 billion per year easily wiped out the up to $15 billion CAD and exerted upward pressure on the rupee. But they have dried up since then, and the government is now appearing powerless to rein in the CAD to its target of $70 billion for FY14. The global economic crisis hasn't helped. In fact, the Indian economy has managed to hit the perfect storm: the government has been twiddling its thumbs, so the courts have shown an unprecedented inclination towards judicial activism.While dithering on matters of economic policy, government has chosen to focus on unaffordable doles and subsidies. The latest in that trend is the rather ambitious food security Bill. Its cost is expected to be in excess of Rs 100,000 crore. God alone knows if the intended benefits will actually reach those for whom they are intended, as the malfunctioning of the PDS scheme is well known. Meanwhile, the prolonged regulatory process of environmental clearances and the difficulties in land acquisition have made industry rethink new projects. The economy has been drifting directionless, with many delays in much needed economic reforms and without incentives for FDI.Largely compelled by government lethargy, the Supreme Court has been intervening in policymaking. This has resulted in further regulatory uncertainties for investors. Sectors ranging from telecom and mining to pharma and real estate have been left shaken.In the coal sector, India has some of the largest reserves in the world, of around 300 billion tonnes. Yet, it's expected to import 82 million tonnes of coal in FY14. With an average price of $100/t, the bill will total to around $8 billion. It was with the very aim of tackling such shortages that successive governments had chosen the policy of captive coal block allocations, instead of taking the auction route. With Coalgate simmering inside SC, and outside, it's now unlikely that coal production will rise in the near future as both government and investors will dither in taking initiatives. Why would an investor choose to develop a captive coal block if the court or the government is likely to de-allocate the same? And why would someone develop any power intensive project associated with a coal block?In the case of natural gas, not only is the KG-D6 basin producing only a fraction of the projections, the matter of pricing this gas has also landed in SC now.Even the star of India's rise in the last decade, the telecom industry, is now in doldrums on account of the double whammy of ever-changing regulations and consequent SC actions. Telecom received cumulative FDI of Rs 58,782 crore in the last 13 years, which accounted for 7% of the total FDI inflows into the country. FDI in the entire telecom sector, which includes radio paging, cellular mobile and basic telephone services, plunged 81.64% in 2012-13 to Rs 1,654 crore. Since SC's '2G scam' decision, only a very brave foreign investor would venture to put his foot into what could be a legal landmine.Lastly, FORGET POLITICS UNITE TO SAVE ECONOMY We can ignore the economic crisis only at our peril. There is widespread panic as the rupee depreciates sharply with every passing day and there's no telling where it will stop. There are multiple factors behind the free fall. Global issues are a big contributing factor, the biggest at the moment being the fear of an impending US intervention in Syria and the resultant hardening of oil prices. Otherwise, the currencies of other emerging markets wouldn't also be crumblingWhile we cannot fully control what happens beyond our shores, we can at least change the growing perception of domestic drift. There's a sense that no one's quite in control in Delhi, that there's a deficit in decision-making, and that there's a lack of clarity of thought. No wonder currency speculators are having a field day and making a bad situation worse.What we need is a bipartisan response to the crisis. While the burden lies primarily with the government, the opposition too needs to throw its weight behind a national effort to pull the economy back from the brink. When the Prime Minister addresses Parliament on Friday, he should take the initiative and call for a concerted effort by the entire political class, setting aside for the moment any political oneupmanship. The Pension Bill and the Insurance Bill need to cleared; pending projects must be fast-tracked; the Supreme Court should be approached for a review of the ban on iron ore imports. The two sides should also resolve the obstacles to rolling out the goods and services tax GSTAt the same time, there should be an agreement to try and leave contentious policy decisions aside for the time being. The last thing we need is a further deterioration of sentiment. Also, it doesn't really help when BJP leaders say that only the next government can save the economy. The next election is eight months away. What do we do in the meantime? Play politics and allow the situation to worsen?Will all this immediately strengthen the rupee and put the economy back on track? Perhaps not. But it will certainly send out a signal that all hands are on deck. And that our politicians can set their differences aside in the interest of the nation.Are we being naive in calling for a bipartisan effort? We would like to believe we aren't. We hope this appeal won't fall on deaf ears and that our political leaders will rise to the occasion. If they do so, they can yet prevent the economy from keeling over the edge. They can also, in the process, redeem themselves in the eyes of the electorate they are so keen to woo.

REFERENCES The Week Magazine Times Of India articles Hindustan times articles Economic times articles www.rbi.org.in

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