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Tuesday, 10 Sep 2013
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What caused Rupee plunge, Internal or External factors?


Rupee value turned volatile in forex markets since May 2013, registering sharp depreciation against major foreign currencies. As per RBI reference rates, rupee lost 19.79 per cent between 2 May - 30 August against USD, 19.28 per cent against GBP, 19.16 per cent against JPY and 18.56 per cent against Euro. The quantum of rupee depreciation against the major global currencies over just around four months, which is record fall for a comparable period since the currency crisis of 1991, has unnerved the government which was already rattled by a retarding economy. India Inc with a steeply enhanced global exposure too is struggling in finding ways to cope with such abnormal conditions in the forex market.


What caused the fall


  Rupees Vs Dollar_ProjectsToday

Portfolio investment by FIIs saw net outflow of $3.6 billion during April-August. Even though equity investment saw a net increase of $2.2 billion, debt exposure dropped to $5.8 billion. The sharpest drain was in June, which saw $1.8 billion outflow in equity and $5.8 billion in debt, adding to $7.5 billion outflow for the month. July saw an outflow of $3 billion while August saw an outflow of $0.183 billion.


FDI into the country totaled $7.6 billion in April-June this fiscal as against $5.9 billion April-June last fiscal, while FDI overseas by Indian companies was placed at $ 0.921 billion as against $2.094 billion.


Forex assets with RBI declined rather sharply by around $9 billion by 23 August in the current fiscal to $250 billion. Most of the decline occurred in May, probably in the second half of the month.


The phenomenon was largely treated as short term, calling for short term response. Guided by the imperative to maintain external value of rupee and containing volatility in forex markets, RBI took several measures in July-August to restrict liquidity in the financial system that could feed speculation in the forex markets. The measures also reflected the apex bank’s worries about the impact of rupee depreciation on domestic inflation as a result of pass- through of enhanced cost of imports.


As part of measures towards containing the current account deficit, certain restrictions were announced on 22 July 2013 on import of various forms of gold by nominated banks/nominated agencies/ premier or star trading houses/SEZ units, etc whereby they would have to ensure that at least one fifth of every lot of import of gold was exclusively made available for the purpose of export. On 12 August 2013, the government raised the customs duty on gold and platinum from 8 per cent to 10 per cent and on silver from 6 per cent to 10 per cent. With a view to containing capital outflow, on 14 August 2013, the limit for Overseas Direct Investment (ODI) under automatic route for all fresh ODI transactions was reduced by RBI from 400 per cent of the net worth of an Indian Party to 100 per cent of its net worth. RBI also came out with various short duration instruments like 7-day, 28-day, 48-day and 56-day cash management bills as also open market operations (OMO) in government securities to mop up excess liquidity in the financial system. Several growth friendly measures including those for faster clearance of mega infrastructure projects, fuel subsidy reform etc were also taken by the Indian Government.


RBI measures appear to have contained rupee erosion and volatility only to some extent as they did not address basic factors behind the depreciation in rupee value which had touched a bottom of 68.36 per USD on 28 August, against 53.74 on 2 May. However, having cramped liquidity, the measures have led to hardening of interest rates initially for short term but also with a potential to spill over to medium and long term durations.


It appears that what triggered the sharp and sudden rupee depreciation was the markets’ reaction to certain unexpected external developments, particularly, the indication by the US Federal Reserve Bank that it would soon ‘taper’ its quantitative easing as the US economy was recovering. This led to a reversal of capital flows from emerging economies; other global factors such as tensions over Syria added to uncertainly on crude oil prices. Indian economy was found more vulnerable because of huge current account deficit and stickiness of several large imports. Governance deficit and a retarding economy were also treated bearishly and RBI and government response targeting rupee instead of improving economy growth prospects led to liquidity crunch and hardening of lending rates that have the potential to further hurt the growth.


Problems, particularly on domestic front are no doubt formidable, but positivism, as against skepticism and negativism that has aggravated problems and harmed the prospects further, should help the recovery in the real economy. The government should also let the rupee find its level by keeping market intervention limited to seek its orderly movement; irrationality in perceptions would gradually get corrected, leading to stability in rupee value. Also, an improving US economy aided by positive pointers in other developed economies, should have beneficial effect on the real economy of developing countries including India which should outweigh by a wide margin bearish possibility of a few basis points rise in interest rates.


Manufacturing Sector Developments


  • Anand Automotive proposes investment over the next five years
  • Rashtriya Chemicals and Fertilzers is planning to invest n its joint ventures for urea and ammonium nitrate plants at Talcher, Orissa
  • Thailand-based Siam Cement Public Company to set up a manufacturing plant in India
  • Honda Motorcycle will invest in capacity expansion for the current fiscal
  • D G Spintex intends to set up a cotton yarn unit at Raypur, Dholka in Ahmedabad district of Gujarat


Infrastructure Sector Developments


  • Olympia Group unveils Aqua Beaumont- a residential project in Kolkata, West Bengal
  • Kandla Port Trust has invited EoIs for construction of cargo jetty at Kandla Port in Gujarat
  • Power Development Department, Jammu and Kashmir has invited bids for power distribution projects in the state
  • Public Health Engineering Department, Rajasthan, has invited bids for the Nokha Daiya-Deshnok water supply project
  • Eight infrastructure companies have evinced interest in bidding for the Mumbai elevated rail corridor project


Power Sector Developments


  • Neyveli Lignite Corporation is scouting for a developer to set up a Solar PV system in Tamil Nadu
  • Power Finance Corporation, has scrapped initial bids received from 20 power companies for setting up the 4,000 MW ultra mega power project in Orissa
  • Hero Future Energies, a wholly-owned subsidiary of Hero Group, is planning to develop over 1,000 MW of renewable energy projects
  • GIFT Power Company has invited bids for hiring consultancy service for its gas-based power plant in Gujarat
  • Leitwind Shriram Manufacturing has received an order for supply of wind turbines for a wind-based power project in Tamil Nadu


FDI Developments


  • Based on recommendations of the Foreign Investment Promotion Board (FIPB), the Union Government has cleared 17 FDI proposals


Quote of the week:


Dr. M S Kapadia_Economics Research India Pvt. Ltd._ProjectsToday

"As for hard data on probable proximate causes, pull out of $5,764 million by FIIs from the domestic debt markets could be one reason, even as barring some volatility in equity markets, other indicators did not display much abnormality."

Dr. M S Kapadia, Director,
Economic Research India Pvt. Ltd.

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