34
Group 14: Jaimin, Kshitij, Ashutosh & Rajat The Rising Rupee

Rupee Appreciation

Embed Size (px)

DESCRIPTION

Presentation

Citation preview

Page 1: Rupee Appreciation

LOGO

Group 14: Jaimin, Kshitij, Ashutosh & Rajat

The Rising Rupee

Page 2: Rupee Appreciation

Contents

The Rupee’s rise and it’s impact1

Why the Rupee needs to appreciate further ?2

Why the Rupee needs to weaken ?3

Conclusion4

The Rising Rupee

Page 3: Rupee Appreciation

The possible reasons

The Rising Rupee

Market forces behind

Exchange Rates, e

Inflation Increase in PPP e strengthens

Interest Rates

Higher return relative to other

countriesIncrease in

foreign inflows e strengthens

Current Account Deficits

Country spending more

on foreign trade than it is earning

Borrows capital from foreign

sources to cover deficit

Excess demand for foreign currency

e weakens

Public Debt

Country becomes less attractive to

foreign investors

Country’s debt rating reduces e weakens

Terms of Trade

Greater demand for a country’s

exports & increasing

revenues from exports

e strengthens

Political stability & economic

performanceCapital inflows

into the countrye strengthens

Page 4: Rupee Appreciation

Is history for or against it?

The Rising Rupee

• The appreciation of the local currency in a sudden spurge

• Past instances in countries like Columbia ?

Dutch Disease

• Is India a victim ?Dutch

Disease

Page 5: Rupee Appreciation

The Impact

The Rising Rupee

Page 6: Rupee Appreciation

What actually happened!

The Rising Rupee

FY06: Economic growth spurted to

9%

Supply shortages + Excess Demand

RBI hikes interest rate

Firms turn abroad to borrow funds

Capital inflows surge (FIIs, FDIs, ECBs,

Remittances)

RBI intervenes (absorbs dollars)

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of

US meltdown

Page 7: Rupee Appreciation

Capital Inflows

The Rising Rupee

• $3.8 billion last year

• Remittances @ $19.6 billion in first half of 2006

• $12.1 billion in first half of 2006

• Financing of acquisitions at home & abroad

• $16 billion in 2006 – 07

• Banking, Telecom, Insurance, Retail, Airlines

• $32 billion over last 4 years

• $4.6 billion in first 5 months of 2007

FIIs FDIs

NRIsECBs

Page 8: Rupee Appreciation

What actually happened!

The Rising Rupee

FY06: Economic growth spurted to

9%

Supply shortages + Excess Demand

RBI hikes interest rate

Firms turn abroad to borrow funds

Capital inflows surge (FIIs, FDIs, ECBs,

Remittances)

RBI intervenes (absorbs dollars)

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of

US meltdown

Page 9: Rupee Appreciation

RBI’s dilemma

The Rising Rupee

Exchange Rate

Market Volatility

Supply of Currency

Demand for

currency

Volatility in Market

RBI intervenes in FOREX markets

Money supply /

inflation gets affected

Page 10: Rupee Appreciation

What actually happened!

The Rising Rupee

FY06: Economic growth spurted to

9%

Supply shortages + Excess Demand

RBI hikes interest rate

Firms turn abroad to borrow funds

Capital inflows surge (FIIs, FDIs, ECBs,

Remittances)

RBI intervenes (absorbs dollars)

Money supply, Inflation increase

Impossible Trinity (M – F model)

Rupee appreciates against backdrop of

US meltdown

Page 11: Rupee Appreciation

The Impossible Trinity

The Rising Rupee

Page 12: Rupee Appreciation

The Impact

The Rising Rupee

Page 13: Rupee Appreciation

Is history for or against it?

The Rising Rupee

• 1966 1983 (7.8) 2002 (49)

• Rate of growth of exports < Rate of growth of importsEarlier

Devaluations

• Japanese exporters cut export prices

• Shifted domestic production to high value items (Lexus of Toyota & Infiniti of Nissan)

• Shifted foreign production to commodity –type products

The Appreciating Yen (1990s)

Page 14: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

Inflation and USD/INR

39

40

41

42

43

44

45

46

47

48

49

50

51

52

Ap

r-0

5

Jun

-05

Au

g-0

5

Oct

-05

Dec

-05

Feb

-06

Ap

r-0

6

Jun

-06

Au

g-0

6

Oct

-06

Dec

-06

Feb

-07

Ap

r-0

7

Jun

-07

Au

g-0

7

US

D/I

NR

-0.80%

-0.40%

0.00%

0.40%

0.80%

1.20%

1.60%

2.00%

Infl

ati

on

(M

oM

ba

sis)

Inflation

(Base Year: 1993 - 94)

USD/INR

2 per. Mov. Avg.

(Inflation

(Base Year: 1993 - 94))

Rupee appreciation needs to be allowed to control

inflation

Page 15: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

On a REER basis, the Indian rupee is estimated to have

depreciated to around 99 in 2006 – 07 down from its

peak of 102 in July 2005

REER

Base Year: 1993 - 94

96

97

98

99

100

101

102

103

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

RE

ER

Page 16: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

Reduced prices of imported raw material like oil & steel

Hence, reduced cost of production

0

50000

100000

150000

200000

250000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Imp

ort

s in

$ m

illio

n

India (Imports)

Others

Iron and Steel

Capital

Gold Silver and Pearls

Petroleum Crude and Products

Page 17: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

A stronger rupee would ensure that the trade deficit is

kept in check despite rising oil prices

Page 18: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

A 10% rise in the rupee, causes an equivalent decrease

in India’s external debt.

Year External Debt of (Rs. Crore)

2005 5,39,389

2006 5,64,280

2007P 6,75,857

Page 19: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisitions

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

Many large companies that have borrowed money

abroad in recent years are likely to benefit from the

strong rupee

With foreign acquisitions expected to grow in the

coming years, the strengthened rupee would prove to

be an added advantage

Page 20: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

Cheaper consumable goods

• Consumer electronics

• Apparels

Cheaper travel abroad

• Students

• Tourists

Reduced R&D expenses

• Automobile

• Electronic & Electrical goods

Page 21: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

• Sterilization is the reduction of interest rates to curb inflation as well as maintain a relatively constant exchange rate amidst increasing capital inflows

• RBI can buy up the excess rupees by issuingbonds (MSS) or increase the CRR

• However, in India’s case, further sterilization would prove to be infeasible

Page 22: Rupee Appreciation

Why the Rupee needs to appreciate further?

The Rising Rupee

Addressing Inflation

Rupee is no longer overvalued

Reduced Production Cost

Trade Deficit

Government External Debt

Reduced Foreign Debts

Foreign Acquisition

Cheaper Imported Goods

Import based foreign investments

Sterilization

Rupee denominated

International debt

Due to an appreciating rupee, people all over the

globe, are getting attracted to this currency

Under such circumstances the government, is

working fast on a scheme to issue rupee

denominated international debt.

The proposal has been mooted by the Department of

Economic Affairs, Ministry of Finance and is being

discussed by policy makers at a higher level

Page 23: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

19

50-5

1

19

52-5

3

19

54-5

5

19

56-5

7

19

58-5

9

19

60-6

1

19

62-6

3

19

64-6

5

19

66-6

7

19

68-6

9

19

70-7

1

19

72-7

3

19

74-7

5

19

76-7

7

19

78-7

9

19

80-8

1

19

82-8

3

19

84-8

5

19

86-8

7

19

88-8

9

19

90-9

1

19

92-9

3

19

94-9

5

19

96-9

7

19

98-9

9

20

00-0

1

20

02-0

3

20

04-0

5

20

06-0

7

US

D / I

NR

Foreign Exchange Reserves

Exchange Rate

Page 24: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

• Around 30% of the share of exports to be affected

• More than 86% of exports in USD

Page 25: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

Page 26: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

FII Inflows and USD/INR

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

Ap

r-0

5

May

-05

Jun

-05

Jul-

05

Au

g-0

5

Sep

-05

Oct

-05

No

v-0

5

Dec

-05

Jan

-06

Feb

-06

Mar

-06

Ap

r-0

6

May

-06

Jun

-06

Jul-

06

Au

g-0

6

Sep

-06

Oct

-06

No

v-0

6

Dec

-06

Jan

-07

Feb

-07

Mar

-07

Ap

r-0

7

May

-07

Jun

-07

Jul-

07

Month - on - Month

FII

In

flo

ws

(Rs.

Cro

re)

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

US

D/I

NR

FII in Rupees Cr.

USD/INR

Page 27: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

• Textile and cotton industries• Exporters considering to layoff 275000

workers by year end

Page 28: Rupee Appreciation

Why the Rupee needs to depreciate?

The Rising Rupee

Forex Reserves

Exports and Exporters

The IT Imbroglio

FIIs on the move

Job Losses

Loss of Business

• Erosion of competitiveness• Business shift to countries with lower

value of exchange rate

Page 29: Rupee Appreciation

Steps taken by RBI !

The Rising Rupee

Rupee Depreciation

Continuous Intervention

Restrictions on ECB

Encouraging Higher Dollar

Spend

Tax SOPs and Promotion

Raising Investment limit

in overseas Ventures

Page 30: Rupee Appreciation

The Rising Rupee

Conclusion

The nation has seen a growth and the economy is rising

India is attracting a large amount of capital inflows

Dealing with these inflows is difficult

Intervening to defend the exchange rate can help reserve

export competitiveness, but it can endanger the inflation

target (Impossible Trinity!!)

Page 31: Rupee Appreciation

LOGO

Your queries are welcome

Page 32: Rupee Appreciation

RBI’s dilemma

The Rising Rupee

Exchange Rate

Market Volatility

Supply of Currency

Demand for

currency

Volatility in Market

RBI intervenes in FOREX markets

Money supply /

inflation gets affected

Page 33: Rupee Appreciation

Capital Inflows

The Rising Rupee

• $3.8 billion last year

• Remittances @ $19.6 billion in first half of 2006

• $12.1 billion in first half of 2006

• Financing of acquisitions at home & abroad

• $16 billion in 2006 – 07

• Banking, Telecom, Insurance, Retail, Airlines

• $32 billion over last 4 years

• $4.6 billion in first 5 months of 2007

FIIs FDIs

NRIsECBs

Page 34: Rupee Appreciation

The Impossible Trinity

The Rising Rupee