Thursday, February 9, 2012

Indian Rupee Fall and Recovery

Hello everybody!!

After long time i am here with a topic which makes you to know the reality and enlighten you with some information. Hope you will feel better about our country's Indian Economy. Don't think its not for the one who have idea only about economics. Its for everyone who wants to know what's happening exactly.

"I saw lot of people who doesn't know how everything works but still started explaining the things in such a way that they get hatred towards India as they point out economy system of India in a bad way. So for them i want make one thing clear that maybe Indian economy looks like obsolete maruti 800 but its engine is like 1200 horsepower powerful and standard engine. So please stop propagating negative about Indian economic system comparing with other countries. No two countries situations will be similar to compare. Maybe some countries stood up quick from the disaster but the situations they have are completely differ from situations in India. Eg: Some people started speaking that Japan stood up quick even after a disastrous tsunami attack but they must consider the area they have, the population they have and the economic system they posses. Same country in 2008 suffered like anything when recession was ruling the world but in the same conditions India tried to with stand because of its standard pillars of economic system. So many people don't have an idea that the Economy of India is the ninth largest in the world by nominal GDP and the third largest by purchasing power parity (PPP)."

Now, if it comes to the post title Indian Rupee Fall and recovery; we saw disastrous time for Indian currency in 2nd half of 2011. Even though it’s recovering slowly, we must think of the reasons once to enlighten ourselves with the concepts of countries' economy.
To understand the concept of fall and its reasons, firstly we must know how the currency exchange works. There are few methods as follows to show how the exchange works.

Methods of Exchange:
There are two main systems used to determine a currency's exchange rate: floating currency and pegged currency.

The Floating Exchange Rate:
The market determines a floating exchange rate. In other words, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors.

Generally, countries with mature, stable economic markets will use a floating system. Virtually every major nation uses this system, including the U.S., Canada and Great Britain. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.
The floating system isn't perfect, though. If a country's economy suffers from instability, a floating system will discourage investment. Investors could fall victim to wild swings in the exchange rates, as well as disastrous inflation.

Pegged Currency:
A pegged, or fixed system, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged to some other country's dollar, usually the U.S. dollar. The rate will not fluctuate from day to day.

A government has to work to keep their pegged rate stable. Their national bank must hold large reserves of foreign currency to mitigate changes in supply and demand. If a sudden demand for a currency were to drive up the exchange rate, the national bank would have to release enough of that currency into the market to meet the demand. They can also buy up currency if low demand is lowering exchange rates.

Countries that have immature, potentially unstable economies usually use a pegged system. Developing nations can use this system to prevent out-of control-inflation. The system can backfire, however, if the real world market value of the currency is not reflected by the pegged rate. In that case, a black market may spring up, where the currency will be traded at its market value, disregarding the government's peg.

When people realize that their currency isn't worth as much as the pegged rate indicates, they may rush to exchange their money for other, more stable currencies. This can lead to economic disaster, since the sudden flood of currency in world markets drives the exchange rate very low. So if a country doesn't take good care of their pegged rate, they may find themselves with worthless currency.

The above explanations of two types of currency will easily make us to understand which type of exchange method is India following (Floating System). Hope you understand how the exchange works. 

Now we will discuss about fall of Indian rupee. In 3rd quarter of 2011 Indian currency met its disastrous ever position which was at ever low INR54 almost(Dec 14) against American dollar. This fall pulled out $500 million from the stock market in just the last five trading sessions.

Reasons for the steep fall:
 First of all, it is a casualty of the general exodus from emerging markets. As a deficit economy, India is bound to suffer more than say Brazil, Korea or Malaysia.  And 18 months of interest rate rises have taken a toll on growth.

UBS analysts  proffer another explanation. They point out a steady deterioration in India’s net reserve coverage since the 2008 crisis. The reserve buffer — foreign-exchange reserves plus the annual current account balance, minus short-term external debt — stands at 9 percent of GDP, down from 14 percent in 2008.  Within emerging markets, only Egypt, Venezuela and Belarus saw bigger declines in net reserve coverage than India.

“What it really means for the present, in our view, is that the rupee is now joining the ranks of higher beta “risk” currencies,” UBS said.

Some have given reasons such as broad gains in dollar overseas due to the decay of euro, huge demand from domestic oil refiners with growing consumer demand for oil (though many argue that falling oil price could be advantageous to rupee). I also have heard of other factors such as disinvestment ( foreign investment has gone done almost by 50% today compared to 2007-2008 period - perhaps due to the corrupt image of Indian economy), slowing down of export, growing current trade account deficit (it has grown almost 3 times since 2007-2008). All these could also be valid reasons. 

After the disastrous period, Indian currency experiencing good time from past 1 month. This quick recovery was not expected as many analysts said that it may continue till May'12. As Indian currency proved itself as a volatile in decline, it is again proving its volatile nature in recovering as well. This is a bit happy news for the investors and importers but mayn't a good news for IT companies.



Currency Recovery:
The Indian rupee rose on strong inflows of the US dollar and recovery in India’s capital market that was once plagued by outflows.

Statistics from the Securities and Exchange Board of India show that overseas investors have bought Indian stocks worth US$ 2.1 billion so far this year and invested US$ 3.2 billion in debt instruments, according to Indian media.

Earlier, foreign investors had lost confidence in the Indian market as the projected annual growth rate of the Indian economy at 8 percent was revised to 7.5 percent. 

Various Indian media quoting different players from the private sector had also reported chances of the rate going below 7 percent.

This led foreign investors to pull back their investments from the Indian market, and the market saw high demand for the greenback raising its value sharply. 

The Reserve Bank of India (RBI) also played a crucial role in bringing down the exchange rate. The RBI imposed a limit on buying and selling of the US dollar and even injected dollars indirectly into the market.  

It closed at 49.15/16 on Thursday(Feb 8) which is 3 months high against american dollar.
This will say that India is almost on its way back but we all have to work to make India full fill all her dreams of reaching 3rd highest GDP by 2025 but please not making it No.1 in population by 2025 with 168mill as researches says. Hope you are leaving not with the negative impression on our own country. Never praise other countries and foreign aspects rather find out the greatness of our own selves which we are ignoring. Stay with the country rather than becoming one of those who points out on India's bad time, rather support it and HOPE FOR THE BEST. Nothing is stable.  Thanks for visiting my Blog and keep on visiting friends. 

(Reference: reuters.com, wikipedia.org, economictimes.com last but not least thanks to GOOGLE.COM)

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                                                                                            --- Koundinya.K

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