DEPRECIATION OF INDIAN CURRENCY: IMPLICATIONS

FOR INDIAN ECONOMY (PROBABLE CAUSES & OUTLOOK)

RESEARCHERS:

PROF.RAJAN NANDOLA

Cell : +91 9769537531

&

PROF.PRITI AGGARWAL

Cell : +91 93210 65517

THAKUR COLLEGE OF SCIENCE & COMMERCE, KANDIVILI-EAST MUMBAI-101

ABSTRACT

INTRODUCTION

Volatility in the exchange rate is increasingly being recognized as a concern for the

Indian economy. The outlook for the Indian currency (INR) has gone through a

drastic change in the last few months. Predicting currency movements is perhaps

one of the hardest exercises in economics as it has many variables affecting the

market movement. However, over a longer term currency movement is determined

by various factors like Balance of payments position, Interest Rate differential,

Inflation and Global Economic conditions.

OBJECTIVE OF THE STUDY

The paper strives to explore the Current Global Scenario of Currency Markets with

reference to the Indian Currency and the causes and the outlook associated with the

same. The Researchers have also formulated some strategies to mitigate the

Currency Risk in India, hampering the Economic growth.

RESEARCH METHODOLGY:

1) The Research will be mainly based on secondary Data collection, analysis

and interpretation.

2) Use of examples, charts and tables will be made to explain the intricacies of

the Concept.

3) Article from Journals and Reference Books will be referred for

understanding the reasons and the facts for the depreciation of the Indian

Currency.

HYPOTHESIS

The paper hypothise that there is a correlation between the Depreciation of

the Indian Currency and the Interest Rates, BOP, Inflation, Global Economic

conditions. The relationships of the various factors with the Currency

depreciation will be studied by application of Regression Analysis.

LITERATURE REVIEW

Working Paper No. AIUB-BUS-ECON-2009-04, Office of Research and

Publications (ORP) American International University-Bangladesh (AIUB),

Depreciation of the Indian Currency: Implications for the Indian Economy,

Sumanjeet Singh: The fall in the value of Indian rupee has several

consequences which could have mixed effects on Indian economy. But,

mainly, there are four expected implications of falling rupee. First, it should

boost exports; second, it will lead to higher cost of imported goods and make

some of the capital intensive projects more expensive to execute; third, it

will increase the cost of dollar loans taken by companies and increase the

foreign debt and fourth, it will slow-down the overall economic growth by

increasing the interest rate and dissuade flow of FIIs.

Rupee Depreciation: Probable Causes and Outlook, STCI Primary Dealer

Ltd, 21 Dec 2011, Amol Agrawal: The Indian Rupee has depreciated

significantly against the US Dollar marking a new risk for Indian economy.

Till the beginning of the financial year (Apr 11-Mar 12) very few had

expected Rupee to depreciate with most hinting towards either appreciation

or status quo in the rupee levels. Those few who had even anticipated may

not have imagined the scale of depreciation with rupee touching a new low

of around Rs 54 to the US Dollar. What is even more interesting to note is

that when other countries are trying to play currency wars and trying to keep

their currencies devalued, India is trying to prevent depreciation of the

currency.

Romi Bhatia, Columbia University School of Int’l & Public Affairs,

January, 2004, Social Enterprise Associates, Paper #3: Working Paper on

Mitigating Currency Risk for Investing in Microfinance Institutions in

Developing Countries: This paper focuses on the risks associated with the

use of foreign direct investments (FDI) by investors in microfinance. Among

the many risks involved in such investments, currency and exchange rate

fluctuations are principal stumbling blocks reducing private investment in

microfinance institutions in less developed countries. The paper explores the

subject with: (1) background on currency fluctuations and five methods

commonly used to mitigate currency risk (2) application of each method in a

hypothetical US$1 million investment/loan in an Indian MFI and (3)

recommendations for investors on assessing and mitigating currency risk.

Scope of Study

The study is been taken to understand the implication of the Indian rupee

depreciation on the Indian Economy and the destabilizing effects of a

financial crisis such that any country feels strong pressure from internal

political forces to avoid the risk of such a crisis, even if the policies adopted

come at large economic cost.. This study will help to mitigate the risk and

will also help to understand the relationship between the factors given

above.

Conclusion

During the last decade, among major economies, India has achieved

consistently impressive growth, second only to China. In the first half of

fiscal 2010–11, the Indian economy grew at a healthy rate of 8.9%, and the

majority of global growth going forward is expected to be driven by

developing countries, specifically India and China. India is home to a vibrant

services economy and a hotbed of outsourcing. Its economy has become

increasingly interlinked with global markets as trade has flourished.

The USD-INR exchange rate is an important indicator of investor sentiment

and can significantly impact not only the fortunes of individual firms and

sectors but also the government.