27 Responses to Devaluation of rupee – its causes, impact and remedy

  1. sumantju says:

    My question is if Chinese Yuan have more value than Indian rupees (10 times) then how come Chinese export is more compared to India?

    • sumantju says:

      *Chinese exporting more (Indian export would be cheaper)

    • omegagoons says:

      What do mean when you say Yuan has 10 times more value than Indian rupee? If you mean the exchange rate, then that means nothing. Its just nominal value. 1 USD is more than 100 Japanese yen. It does not mean Yen is less valuable than rupee. What matters is purchasing power. If it costs 100 Rs. to buy a T shirt in India and it costs 10 Yuan to buy a T shirt in China, then it does not matter if you get only 10 yuan in exchange of your 100 rupee. 100 Rupee has same value as 10 Yuan.

      • sumantju says:

        But the production cost of the T-shirt (anything we can export) in India would be less compared to its production in China on the basis of exchange rate, then why India exporting less compared to China, or in simple words products made in India will be cheaper compared to China in an International market, then how come China exporting more compared to India.

  2. omegagoons says:

    why would it be less? It is not less, labor cost in china is lower, economy of scale reduces manufacturing cost and the chinese economy is designed to mass produce for export. It has nothing to do with exchange rate. Exchange rate in itself says nothing about cost.

    I suggest you read Fundamentals of Macroeconomics by Gregory Mankiew. Its fascinating book to give you basic initiation in macroeconomics.

    • sumantju says:

      There will be effect of exchange rate on export as you have mentioned in the article(paragraph no. 12, 13, 14), therefore the demand of the Indian product should be high cause it will cheaper compared to Chinese product.

      one point is labor cost in china is lower but so it is India, but the Economy of scale which reduces manufacturing cost is lower in India.

      But if there is demand we can increase the economy of scale.

      Again if Product is cheaper, there will be demand, and if there will be demand India can increase economy of scale.

      After considering all the points you mentioned in paragraph and in reply I did not get why china exporting more compared to India?

      Its been a long time (around 2 years back) I read that book you mentioned above (You had only suggested me in 2009 to read and understand the macroeconomics :) ). I will revise it.

  3. omegagoons says:

    When Rupee is at Rs. 40/$ and Yuan is Y 6/$ then chinese export is cheaper and so is its labor cost (that is why china was giving hard time to Indian exporters). But if rupee depreciates to Rs. 60/$ (as has happened) and Yuan is stable at that value then Indian exports will become cheaper when compared to chinese exports and its demand will increase. That is precisely what is happening. But, there are some other costs involved in switching vendor. So, in case of temporary fluctuations, major firms will not switch their vendors. Only small time merchants will switch to cheaper country. But, if cheaper rupee persists, then it will make sense for larger firms to switch to India too.

  4. abhilasha02 says:

    Fall in value of rupee will lead to increase in export of India and it can help in balancing the trade deficit.Then why fall of rupee to 60/per dollar is considered bad for economy?

    • Sumant Singh says:

      Export can only increase if there is production. Take a case of china, China have overproduction in almost all industries (On the basis of natural resources availability) like agriculture(plantation of litchi tree is banned because of over production), manufacturing etc. Every year China introduces 1% of its population to its booming manufacturing industry, so there is very large scale production of exports.

      But India is not able to meet domestic(you cannot export domestic product on international standard) demand (lack of infrastructure, huge opportunity in every industry) in most of the industry, How can you expect to increase in export.

      So even if rupee fall India wont be able to export more (at-least not with this political volatility and high rate of interest). In article it is clearly mentioned about the Impossible Trinity which India is trying to achieve.

      And fall in rupee causing hard time for importers (companies which imports losing there floating market value every day in stock market).

      In simple words India is not ready for fall in rupee, and there is need for reform.

      So rupee fall is considered bad for economy.

  5. luckymarut says:

    The biggest reason for worry is that our import mostly consist of oil and its consumption is inelastic mean the consumption of oil will not decrease significantly because it will affect our economy, and so we have to pay a huge amount of money for our oil import so it is cause of worry.

  6. Ankit says:

    Isn’t it better that we have good trade relations with countries like Iran(oil supplier) than US? We could have some agreement that we would pay you in rupees instead of dollars, and you can use the same to import other goods from us… :) This way we could save our precious dollars(or other currencies)

  7. omegagoons says:

    Today, on 30th the prime minister of India Man Mohan Singh delivered following speech in the Parliament. It also gives some new insight as well as government’s stand on the issue. Here is the copy of the speech.

    “Madam Speaker and Hon’ble Members of this august House: The movement of the exchange rate of the Rupee recently is a matter of concern to the government. The Rupee has depreciated sharply against the dollar since the last week of May. There are concerns, and justifiably so, of the impact this would have on our economy.

    What triggered the sharp and sudden depreciation was the markets’ reaction to certain unexpected external developments. On May 22, 2013, the US central bank indicated that it would soon ‘taper’ its quantitative easing as the US economy was recovering. This led to a reversal of capital flows to emerging economies which are now sharply pulling down not just the Rupee, but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah, the South African Rand and many other currencies.

    While global factors such as tensions over Syria and the prospect of US Federal Reserve tapering its policy of quantitative easing have caused general weakness in emerging market currencies, the rupee has been especially hit because of our large current account deficit and some other domestic factors. We intend to act to reduce the current account deficit and bring about an improvement in the economy.

    In 2010-11 and the years prior to it, our current account deficit was more modest and financing it was not difficult, even in the crisis year of 2008-09. Since then, there has been a deterioration, mainly on account of huge imports of gold, higher costs of crude oil imports and recently, of coal. On the export side, weak demand in our major markets has kept our exports from growing. Exports have been further hit by a collapse in iron ore exports. Taken together, these factors have made our current account deficit unsustainably large.

    Clearly we need to reduce our appetite for gold, economise in the use of petroleum products and take steps to increase our exports.

    We have taken measures to reduce the current account deficit. The Finance Minister has indicated that it will be below $ 70 billion this year, and we will take all possible steps to ensure that outcome. These are already showing results with a declining trade deficit in both June and July. The Government is confident that we will be able to lower our current account deficit to $70 billion. Our medium term objective is to reduce the current account deficit to 2.5 percent of our GDP. Our short term objective is to finance the current account deficit in an orderly fashion. We will make every effort to maintain a macro economic framework friendly to foreign capital inflows to enable orderly financing of the current account deficit.

    Madam Speaker, coming back to the effects of the Rupee depreciation, we must realise that part of this depreciation was merely a needed adjustment. Inflation in India has been much higher than in advanced economies. Therefore, it is natural that there has to be a correction in the exchange rate to account for this difference. To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports.

    There are many sectors which are regaining competitiveness in export markets as a result of the fall in the exchange rate. Over the next few months, I expect the effects of this to be felt more strongly, both in exports and in the financial position of exporting sectors. This in itself would correct the current account deficit to some extent.

    However, foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening not only in relation to the Rupee but also other currencies.

    The RBI and Government have taken a number of steps to stabilize the rupee. Some measures have given rise to doubts in some quarters that capital controls are on the horizon. I would like to assure the House and the world at large, that the Government is not contemplating any such measures. The last two decades have seen India grow as an open economy and we have benefited from it.

    There is no question of reversing these policies just because there is some turbulence in capital and currency markets. The sudden decline in the exchange rate is certainly a shock, but we will address this through other measures, not through capital controls or by reversing the process of reforms. The Finance Minister has clarified this, and I take this opportunity to reaffirm our position.

    Madam Speaker, ultimately, the value of the rupee is determined by the fundamentals of our economy. While we have taken a number of actions to strengthen those fundamentals, we intend to do more.

    Growth has slowed down in recent quarters. I expect growth in the first quarter of 2013-14 to be relatively flat, but as the effects of the good monsoon kick in, I expect it to pick up.

    There are many reasons for this optimism. The decisions of the Cabinet Committee on Investment in reviving stalled projects will start bearing fruit in the second half of the year. The full effect of the growth friendly measures that have been taken over the last six months, such as liberalizing norms for FDI, resolution of some tax issues of concern to industry and fuel subsidy reform will come into play over the year resulting in higher growth particularly in manufacturing. Exports are also starting to look up as the rest of the world is improving its growth. So I believe growth will pick up in the second half of the fiscal year barring extreme unforeseen eventualities.

    There are questions about the size of the fiscal deficit. The government will do whatever is necessary to contain the fiscal deficit to 4.8 percent of GDP this year. The most growth-friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor, and we will take effective steps to that end.

    Inflation measured by the Wholesale Price Index has been coming down, even though inflation measured by the Consumer Price Index is still too high. The depreciation of the rupee and rise in dollar prices of petroleum products will no doubt lead to some further upward pressure on prices. The RBI will therefore continue to focus on bringing down inflation. The favourable monsoon and the anticipated good harvest will help bring down food prices and ease the task of controlling inflation.

    All in all, the macro-stabilization process which should support the value of the rupee is under way. I expect that as the fruits of our efforts materialize, currency markets will recover.

    Madam Speaker, even while we go about doing what is necessary, it is important to recognize that the fundamentals of the Indian economy continue to be strong. India’s overall public-debt to GDP ratio has been on a declining trend from 73.2 percent of GDP in 2006-07 to 66 percent in 2012-13. Similarly, India’s external debt is only 21.2 percent of GDP and while short-term debt has risen, it stands at 5.2 percent of GDP. Our forex reserves stand at $278bn, and are more than sufficient to meet India’s external financing requirements.

    Many foreign analysts worry about banking problems in the wake of the currency crisis. The Indian banking sector has seen some rise in bad loans. The question that needs to be asked is whether there is a liquidity problem or a solvency problem for the borrowers. My belief is that there is a liquidity problem. Many of the projects are not unviable but only delayed, in contrast to the over-building that has characterized the banking sector problems in other countries. As these projects come on stream, they will generate revenue and repay loans. Our banks are fortunately well capitalized much above the Basel norms and have the capacity to provide for any non-performing assets until those assets are turned around.

    Madam Speaker, the easy reforms of the past have been done. We have the more difficult reforms to do such as reduction of subsidies, insurance and pension sector reforms, eliminating bureaucratic red tape and implementing Goods and Services Tax. These are not low hanging fruit and need political consensus.

    It is here that I urge Members across the political spectrum to reflect on the need of the hour. Many laws that are necessary are held up for lack of political consensus. Reforms such as the Goods and Services Tax, which everyone agrees is essential to restore growth, require States to come to an agreement. We need to forge consensus on such vital issues. I urge political parties to work towards this end and to join in the government’s efforts to put the economy back on the path of stable and sustainable growth.

    There may be short term shocks to our economy and we need to face them. That is the reality of a globalised economy, whose benefits we have reaped in the last 15 to 20 years. We will need to ensure that the fundamentals remain strong so that India continues to grow at a healthy rate for many years to come. That we will ensure. We are no doubt faced with challenges, but we have the capacity to address them. It is at times like these that the nation shows what it is truly capable of.

  8. Ram Mohan says:

    @omegagoons Excellent article that but does’nt fiscal deficit become a part of water in the pump example given

  9. Gaurav says:

    Very informative Article :) Thank you for posting..

  10. anu says:

    very useful article as it give more knowledge about deprecating of rupees

  11. Jitendra says:

    i do project on impact of depreciation of indian rupee on trade

  12. abhishek says:

    a very well written and informative article and the best part was that i having almost no idea of macroeconomics or its terminology was still able to understand it and think upon it. looking forward to more from you and also i would be thankful if you could suggest a good book (level: starter)

  13. Ingle R. P. says:

    Very nice article.

  14. maunika nauriyal says:

    worth reading……..

  15. JAYASEKHAR says:

    nice job, it is very usefull for me, thank you very much.

  16. naina says:

    thank you there…..am working on a project about devaluation of money and your article has made many things clear now in my mind….areally informative…

  17. Anandhikrishna.g.k says:

    m gonna go read that book now…principles of macroeconomics..:D

  18. LAKSHMAN KUMAR says:

    THIS IS VERY USEFUL TO EVERYONE WHO ARE INTRESTED TO KNOWN MORE ABOUT

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