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)
Keep visiting friends. :)
--- Koundinya.K
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