Currency At Crisis

113
CURRENCY AT CRISIS
Why is Indian Rupee Falling Freely ?
BACKGROUND
When this article was finalised on 23rdAugust,
2013 INR was trading at 64.50 after a bounced
back opening at 64.30 in early trade on fresh
selling of the US dollar by exporters. The INR
had lost 44 paise to close at a new low of 64.55
against dollar on 22nd August 2013 after
breaching ` 65/US$ mark to all-time intra-day
low of 65.56 in 22nd August’s trade at the
Interbank Foreign Exchange market. This raised
shock wave all-across. The free fall of INR
could remind of 1990-91 Balance of Payment
(BoP) crisis1
when the Rupee was highly
overvalued, and the Government devalued it
by 18-19 per cent. Now the authorities are
trying to arrest the fall by tightening liquidity,
imposing restrictions on imports and overseas
investments. Though many feel the Rupee will
fall further on growth concerns.
Figure 1 : US$/INR Exchange Rates
April-August 2013
US$/INR
Aug 23, 2013 65.0252
Aug 22, 2013 64.2165
Aug 21, 2013 63.8104
Aug 20, 2013 63.1695
Aug 19, 2013 62.6540
Aug 18, 2013 62.6540
Aug 17, 2013 61.9758
Aug 16, 2013 61.3759
Aug 15, 2013 61.4451
Aug 14, 2013 61.4251
Aug 13, 2013 60.9402
DR.T.P.GHOSH
Professor, Institute of Management
Technology, Dubai
ECONOMY
September 1 to 15, 2013 u Taxmann’s Corporate Professionals Today u Vol. 28 u 117

114
Indian Rupee lost 5.53% in 2011-12 as compared
to 2010-11, 12.84% in 2012-13 over 2011-12,
19.72% up to August 2013 over 2012-13, and
by 6.70% within 10 days in black August.
There is a down turn in the economy but the
latest downfall may squarely be blamed on
sentiment driven market behaviour.
Frequently cited internal and external factors
for current depreciation of rupee are:
(1) Widening Current Account Deficit (CAD);
(2) Rising retail inflation in India;
(3) Apprehension of widening fiscal deficit;
(4) Policy paralysis to push reforms;
(5) Economic slow-down;
(6) FED tapering view; and
(7) Capital outflows.
In this context, the 1990-91 Balance of Payment
(BoP) crisis and consequential INR depreciation
is not an unfair comparison sans the so-called
better state of foreign currency reserve this
time. The BoP crisis of 1990-91 was culmination
of (i) fiscal deficit and gradually increasing
overvaluation of currency, (ii) external political
environments like break-up of the Soviet Union
and the unification of Germany, (iii) oil shock
arising out of First Gulf war, and (iv)three
changes of Government domestically and
unprecedented socio-political upheaval [1]. On
the other hand, conditions today mostly arise
out of global slow-down, widening CAD and
apprehension of failure to maintain fiscal
discipline on the domestic front.
We shall briefly highlight these issues, review
the policy measures adopted to arrest fall in
Rupee, REER signals, and future of the Indian
currency.
WIDENING CAD
Exchange rate of Indian currency is principally
dependent on the forces of demand and supply,
which in turn are determined by the flows of
the current and capital accounts. Fundamentally,
CAD reflects imports and exports of goods
and supplies, while the capital account reflects
the money that has been invested by foreigners
in India and the monetary investments that
Indians have made abroad. India historically
has had CAD, and never a trade surplus –
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115
India’s total exports have never exceeded imports,
leading to a trade deficit. India is primarily
an import driven economy and its trade deficit2
has been met by foreign investments in the
form of Foreign Direct Investment (FDI) and
Foreign Institutional Investors (FII) inflows.
Widening trade deficit of India over the years
(Refer to Figure 2) would become a cause for
concern if produced by chronic structural
deficiencies. For developing countries structural
trade deficits can be difficult to finance, making
them unsustainable after a point in time. This
is because the chronic nature of the problems
leaves little scope for policy intervention. The
situation worsens if the deficiencies are
accentuated by adverse circumstances. [2]
Figure 2 : Declining CAD/GDP Ratio
Source: Reserve Bank of India
HIGH INFLATION
Inflation pressures eased in Advanced Economies
(AEs) and some Emerging Market and
Developing Economies (EMDEs) during Q2 of
2013. In India, average headline inflation during
Q1 of 2013-14 at 4.8 per cent is significantly
lower than the average inflation of 7.5 per
cent during Q1 of 2012-13 and 7.4 per cent
during the year 2012-13. The headline inflation
exhibited a softening bias during Q1 of 2013-
143
, driven by all three major sub-groups, viz.,
primary articles, fuel and power and
manufactured products with major contributions
from the non-food manufactured products group.
This is of course because of lower global
commodity prices.
u The revisions in administered prices, par-
ticularly of diesel and electricity, led to
a pick-up in inflation for administered
price items during April-May 2013.
First Quarter Review 2013-14 by the Reserve
Bank of India sent a strong signal to the market
participants:
“Even though the current account deficit (CAD)
to GDP ratio moderated to 3.8 per cent in Q4
of 2012-13 from its historic high of 6.5 per cent
in Q3 of 2012-13, indications are that it may
have widened again in Q1 of 2013-14. Going
forward, the current account is expected to
show improvement with likelihood that gold
imports may fall. However, risks to CAD
financing have increased due to capital outflows
from EMDEs. This has put rupee under pressure.
Vulnerability indicators of the external sector
have deteriorated. In this milieu, concerted
policy reforms are needed to reduce CAD and
to improve financing by attracting more stable
capital flows to the Indian economy.” [3]
Apart from import of crude oil, gold and coal
have also contributed to widening CAD that
has reached 4.8% of GDP.

116
u Food price inflation has been a major driver
of headline inflation in recent years. High
input costs, rising wages and inelastic supply
responses to demand led to higher food
price inflation.
u The depreciation of the Rupee and in-
crease in global crude prices following
the political uncertainties in the Middle
East led to some increase in the prices of
freely priced fuel products in June–July
2013.
u Upward price revision of coal prices by
Coal India from May 28, 2013 led to an
increase in input cost pressures for coal
consuming industries.
u Several State Electricity Boards (SEBs) re-
vised their prices upwards in May 2013,
which led to a 13 per cent increase in the
electricity price index in the WPI.
However, there has been a divergent trend in
the movement of retail price index (Refer to
Figure 3).
Figure 3 : Comparative Movement of CPI and WPI
It has been explained that this divergent
movement of WPI and CPI is so pervasive that
the RBI REER index failed to provide a danger
signal of INR depreciation.
The RBI observed that [3]: “In the case of
market integration the price pressures should
reflect identically in the wholesale and retail
markets as movements in wholesale prices should
translate to the retail market with some lag.
However, supply-demand gap at the regional
level, could lead to greater pressures on retail
prices than in the wholesale market. This requires
improving the current state of supply chain
management to provide better market access
to farmers, storage facilities and transportation.”
However, policy paralysis caused continued
bottleneck in the supply chain management.
Fiscal deficit
Fiscal deficit is the difference between the
government’s expenditures and its revenues
excluding borrowings. Fiscal deficit is usually
communicated as a percentage of GDP. Main
causes fiscal deficit are - Government spending,
inflation and lower revenue. The pernicious
nature of fiscal deficit does not only jeopardize
the growth of the country but also the
government’s economic management abilities.
The unprecedented global financial crisis of
2007, which coincided with a domestic economic
slowdown, necessitated an expansionary fiscal
policy in an exceptional year. Serious deviations
of the revenue and fiscal deficits from the
budget estimates continued. However, helped
2012-13 worked out to be at 4.89 per cent of
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117
GDP which was lower than the revised estimate
of 5.2 per cent. Moving forward in 2013-14,
fiscal deficit has been targeted to be contained
below 4.8 per cent of the GDP.
On the contrary, the impact of the Food Security
Bill, which guaranteed quality food grains at
subsidized rates, on fiscal deficit is estimated
at 0.5 per cent by experts. And then earlier
in July 2013, the reassurance of the Government
of India that execution of the Food Security
Bill would not affect the fiscal deficit target
went unheard. Fiscal deficit has been a key
concern for credit rating agencies as well.
The Government promulgated an ordinance to
implement the Food Security Bill, giving over
two-thirds of the population the right to 5 kg.
of food grain each month at the subsidised
rates of one to three rupees per kg. Government
spending on the programme is estimated at `.
1,25,000 crore annually for supplying about 62
million tonnes of rice, wheat and coarse cereals.
Federation of Indian Chambers of Commerce
and Industry’s Economic Outlook Survey
observed that it will impose an additional
pressure on the fiscal situation and would
make fiscal sustainability plan of the country
difficult to achieve. As a result, the expected
fiscal deficit to GDP ratio may move up to 5
per cent for 2013-14, which is slightly above
the budgeted 4.8 per cent.
The fear of higher fiscal deficit has been
aggravated by the statistics that total expenditure
as a percentage of the budget estimate in the
first two months (April-May) of 2013-14 was
higher than a year ago. This was mainly due
to higher plan and capital expenditure, which
registered growth rates of 52.6 per cent and
48.9 per cent, respectively, over April-May
2012.
In case the Government’s revenues fall short
of the target due to slowdown in growth,
there is in fact a need for expenditure cut to
achieve the budgeted fiscal deficit. It is, therefore,
important to contain subsidies and re-prioritise
expenditure towards plan and capital
expenditures, thereby enhancing the growth
prospects of the economy, whereas the
Government has been found to be enhancing
the subsidies.
POLICY PARALYSIS TO PUSH REFORM
“Policy paralysis” has become a pet phrase of
the critics. Although this is not an unfounded
hypothesis, there are delayed reform efforts
on the part of the Government :
u The Union cabinet decided to raise the
FDI cap in the telecom sector from the
earlier 74 per cent, even overruling secu-
rity concerns expressed by the home
ministry, to 100 per cent to meet the demand
of the fund starved sector.
u The cabinet eased norms for FDI in multi-
brand retail, a controversial decision taken
last year that allowed a foreign retailer
to open stores in 53 cities with more than
one million population. There is a pro-
posal to allow them to penetrate smaller
markets too. Easing norms, the Govern-
ment diluted the mandatory 30 per cent
local sourcing of goods for these foreign
retailers while noting that new guidelines
would bring in more clarity and more
space for investors.
u The Government also liberalised rules for
overseas companies looking to invest in
manufacture of defence goods. Investment
norms for various other sectors too were
eased.
u The Companies Bill has been passed that
aims at transparency and globally com-
patible regulations.
u The Government is talking to other po-
litical parties to push the Land Acquisi-
tion Bill to provide for rehabilitation and
resettlement of people displaced due to
acquisition; the Goods and Services Tax,
a value added tax which will replace indirect
taxes; the direct taxes code, to replace the
Income-tax Act.

118
Other reformist legislations are the Real Estate
(Regulation and Development) Bill which seeks
to establish the Real Estate Regulatory Authority,
the Forward Contracts (Regulation) Amendment
Bill, the Civil Aviation Authority Bill, Drugs
and Cosmetics (Amendment) Bill.
But there is a crisis of confidence arising out
of undue delay, political conflicts and
compounding corruption charges against the
Government.
ECONOMIC SLOW DOWN
This is probably the major cause of unprecedented
rupee turmoil. Some important facts [3] are
presented below:
u Manufacturing sector growth remained al-
most stagnant during April-May 2013.
Important industries such as machinery
and equipment, basic metals, fabricated
metal products, computing machinery, food
products and motor vehicles registered
contraction in output during the period.
u Core industries continued to be adversely
affected by supply bottlenecks and infra-
structure constraints, thereby growing only
at 2.4 per cent during April-May 2013-14,
which is much lower than in the corre-
sponding period of the previous year. While
the output of coal, natural gas, fertilisers
and crude oil contracted during the pe-
riod, there was deceleration in the pro-
duction of electricity, petroleum refinery
products and cement.
u The services sector recorded the lowest
growth in 11 years at 6.8 per cent during
2012-13. Activity in the ‘financing, insur-
ance, real estate & business services’ and
‘trade, hotels, restaurant, transport & com-
munication’ sectors decelerated. The de-
cline in lead indicators, such as automo-
bile sales, cargo handled at major ports
and civil aviation sector, during April-
June 2013 signal a further slowdown in
the services sector.
The Reserve Bank of India Commented [3]
that ‘as per the use-based classification of
industries, with the exception of intermediate
goods and consumer non-durables, the growth
of all other categories declined during April-
May 2013 [See Table 1].
Persistent power shortages affected the capacity
utilisation of the manufacturing sector. As a
result, backlogs of work accumulated in the
sector. But the growth of power generation
has remained at 5.3 per cent during April-May
2013.
The shadow of economic slow down has been
looming large. When viewed through the prism
of ‘policy paralysis’, political uncertainty,
enlarged CAD, enhanced subsidies, the sharp
fall of the INR is explained.
Table 1 : Index of Industrial Production: Sectoral and Use-Based Classification of Industries
(Per cent) Growth Rate
Industry Group Weight in Apr-Mar April-May 2013-14P
the IIP 2012-13 2012-13
1 2 3 4 5
Mining 14.2 -2.4 -1.7 -4.5
Manufacturing 75.5 1.2 0.4 0.1
Electricity 10.3 4 5.2 5.3
User-Based
Basic Goods 45.7 2.4 3.2 0.7
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Capital Goods 8.8 -6.1 -15.2 -1.5
Intermediate Goods 15.7 1.6 0.8 2.1
Consumer Goods (a+b) 29.8 2.4 4 -1
a) Consumer Durables 8.5 2 7.5 -9.6
b) Consumer Non-durables 21.3 2.7 1.1 6.7
General 100 1.1 0.6 0.1
(Per cent) Growth Rate
Industry Group Weight in Apr-Mar April-May 2013-14P
the IIP 2012-13 2012-13
Note: P: Provisional
Source: Central Statistics Office
begin to perform more in line with economic
fundamentals which means weaker performance.
However, tapering is not an immediate, dramatic
event. Instead, it is likely to take place over
an extended period of time so as to create
minimal market disruption.
CAPITAL OUTFLOW
Capital outflow is rather an outcome of various
causes deliberated above rather than a cause
in itself. However, in times of widening CAD,
it causes panic and further disruption.
The Reserve Bank of India in its report [3]
remarked that:
u Trends to date in 2013-14 suggest an uptrend
in capital flows in the form of FDI and
NRI deposits, while ECBs showed a de-
cline as compared with previous quarter.
u Net FII flows were substantial until the
third week of May 2013, followed by a
significant outflow in the subsequent period.
Since the last week of May 2013, there
was a net outflow of US$ 12.1 billion on
account of FIIs (till July 18). The reversal
of FII flows from the domestic market
was mainly evident in the debt segment.
u The outflows of FIIs from the domestic
debt market was led by the global bond
sell-offs on Fed signals that raised the
FED TAPERING VIEW
Tapering is a term that exploded into the financial
lexicon on May 22, when U.S. Federal Reserve
Chairman Ben Bernanke stated in a testimony
before Congress that Fed may taper the bond-
buying program known as Quantitative Easing
(QE) in the coming months. Currently,
expectations are that the Fed will bring its
current pace of $85 billion per month in bond
purchases to $60 or $65 billion within its next
three meetings, which will take place on
September 17-18, October 31, and December
17-18.
Since the Fed Chairman’s May 22, 2013, testimony
the Rupee depreciated significantly (by 7.5
per cent) till July 15 as global investors began
unwinding their risky positions in emerging
markets. The dollar strengthened against major
currencies. However, Rupee fell sharply as
compared to other currencies (Refer to Table
2).In the year to date US dollar index strengthened
by 1.91 per cent. The strengthening of dollar
is beyond Government’s control which is
ultimately hammering the Indian currency.
In the recovery that has followed the 2008
financial crisis, both stocks and bonds have
produced outstanding returns despite economic
growth that is well below historical norms.
The general consensus is that Fed policy is the
reason for this disconnect. Once the Fed begins
to pull back on it stimulus, the markets may

120
prospects of global interest rates harden-
ing, shifts in yield spreads and the el-
evated cost of hedging a volatile Rupee.
As per the market report:
u Withdrawal by overseas investors amounts
to `. 18,500 crore (about USD 3 billion)
from the Indian capital markets in July
2013.
u In June 2013 a record `. 44,162 crore (over
USD 7.5 billion) was withdrawn.
The continuing FIIs outflows have put a
continuous pressure on rupee not allowing it
to come out of the slump. Meanwhile, leading
global bank Goldman Sachs has downgraded
Indian stocks to underweight and recommended
investors to stay selective on concerns of economic
growth recovery.
REAL EFFECTIVE EXCHANGED RATE
Real Effective Exchange Rate (REER) Indices
measure how nominal exchange rates, adjusted
for price differentials between a country and
its trade partners, have moved over a period
of time. One way to gauge the fundamental
value of a currency is to look at the REER.
It means in accounting for inflation differences
with its trading partners, how does a currency
stack up. Taking 2004-05 as the base year with
a value of 100, the average REER of the Rupee
in 2012-13 against 36 currencies was 97.42 as
compared to 104.06 in 2011-12 and 106.08 in
2010-11. It means that the Rupee has, since
2004-05, appreciated by 6.08 per cent in real
effective terms against its major trade partners
in 2010-11, and with a marginal decline in
2011-12, it lost 2.58 per cent in 2012-13.
It is also used as an indicator of a country’s
overall international competitiveness. A decrease
in the REER would normally lead ceteris paribus
to an improvement in the country’s real trade
balance over time. A REER index basically has
three components – range of foreign countries
covered, their relative weights and the price
indices to be compared.
The main focus of the REER is on the trade
balance, particularly on the exchange rate induced
changes in trade flows. A trend appreciation
of the REER is considered unfavourable for
the growth of exports and as it favours imports
from competing countries.
In this context, presented below are the REER
and NEER indices of India over 2004-05 to
2012-13:
Table 2 : REER and NEER Indices of India
36 Currency bilateral weights
(Base 2004-05)
Year Export Based Weights Trade Based Weights
REER NEER REER NEER
2004-05 99.86 99.72 99.82 99.67
2005-06 102.74 102.21 103.10 102.24
2006-07 101.05 98.00 101.29 97.63
2007-08 108.57 105.61 108.52 104.75
2008-09 97.77 94.00 97.80 93.34
2009-10 96.67 91.42 95.67 90.94
2010-11 106.08 94.74 103.93 93.54
2011-12 104.06 89.13 101.38 87.38
2012-13 97.42 80.05 94.61 78.32
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Notes :
(1) Data for 2011-12 and 2012-13 are provisional.
(2) REER indices are recalculated from 1993-94 onwards using the new Wholesale Price Index (WPI)
series (Base : 1993-94 = 100).
(3) The Base year has been changed from 1993-94 to 2004-05.
(4) The 36-Country REER & NEER are revised as 36- Currency REER & NEER respectively and for
“note on Methodology” on the indices, please see 2005 Issue of RBI Bulletin.
Source : Reserve Bank of India
From Table 2, it is evident that Indian REER
indices failed to adequately signal fundamental
weaknesses of the economy like much higher
retail inflation, worsening trade deficit and current
account deficit of the country. Although it was
signalling INR depreciation but the sharp decline
was not evident. It continues to give moderate
depreciation signal (Refer to Table 3).
Table 3: Indices of Real Effective Exchange Rate (REER) and Nominal Effective
Exchange Rate (NEER) of the Indian Rupee
Item 2011-12 2012-13 2012 2013
July June July
1 2 3 4 5
36-Currency Export and Trade Based
Weights (Base: 2004-05=100)
1 Trade-Based Weights
1.1 NEER 87.38 78.32 77.56 73.77 72.54
1.2 REER 101.38 94.61 93.46 89.26 87.78
2 Export-Based Weights
2.1 NEER 89.13 80.05 79.30 75.47 74.22
2.2 REER 104.05 97.42 96.31 91.72 90.21
6-Currency Trade Based Weights
1 Base: 2004-05 (April-March) =100
1.1 NEER 84.86 76.11 75.95 70.51 69.20
1.2 REER 111.86 105.46 104.16 98.77 96.94
2 Base: 2010-11 (April-March) =100
2.1 NEER 92.41 82.87 82.71 76.78 75.36
2.2 REER 97.35 91.77 90.65 85.96 84.36
Source: RBI Bulletin August 12, 2013
Contrary to the moderate INR depreciation
signal given by REER indices, the INR
encountered sharp market reaction (Refer to
Table 4).

122
Table 4 : INR Depreciation Rate
Period average INR
US$/ INR Depreciation
Exchange
Rate
2010-11 45.6096
2011-12 48.1335 5.53%
2012-13 54.3142 12.84%
23 Aug-13 65.0254 19.72%
REER has lost all its practical relevance! Perhaps
application of consumer price index would
better capture the state of inflation in India.
Refer to Comparative Chart of CPI and WPI
in Figure 3.
STEPS TAKEN TO ARREST RUPEE FALL
The RBI Governor has explained that ‘the
dilemma for RBI is the maintenance of a balance
between growth and inflation. The three
objectives of a monetary policy are to stimulate
growth, contain inflation and ensure financial
stability’.
The RBI has adopted the following cash tightening
measures to stabilize Rupee:
u Reduced level of RBI funding: It has halved
the daily funds available from it to banks.
The funds RBI lends to individual banks
under the Liquidity Adjustment Facility
(LAF) have been reduced to 0.5% of the
deposits of a bank, compared to 1%, or
` 75,000 crore available previously for the
entire financial system.
u Increase in CRR maintenance level: Banks
were allowed to maintain their Cash Reserve
Ratio (CRR) on an average daily basis
during a reporting fortnight, with a mini-
mum of 70 per cent of the required CRR
on a daily basis. Effective from July 27,
2013, banks are required to maintain a
minimum daily CRR balance of 99 per
cent of the requirement.
u Increased MSF rate: It has raised lending
rates to commercial banks under the
Marginal Standing Facility (MSF) by 2
per cent to 10.25 per cent making the
loans costlier.
u Restriction on NDF: The RBI has restricted
the ability of foreign funds to play in the
offshore Non-Deliverable Forward (NDF)
market.Foreign institutional investors will
have to secure mandates from clients for
hedging the underlying securities of sub-
account investors and holders of partici-
patory notes.
u Duty on gold import: Gold is India’s big-
gest luxury import which is one of the
major contributors to widening CAD. Gold
contributes about 10% of the total im-
ports of India. A series duty increases on
gold has reduced the imports in June 2013
to $2.45 billion, which rose again in July
2013 to $2.9 billion.
Import duty on refined gold bars has been
increased to 10 per cent compared to 8
per cent previously, the third hike in eight
months.The factory gate duty on gold bars
will be 9 per cent against 7 per cent ear-
lier. The import duty on silver increased
to 10 per cent from 6 per cent.
u Duty on non-essential luxury goods:The Rev-
enue Department amended the rules so as
to disallow import of flat panel (LCD/
LED/Plasma) television as part of free
baggage allowance with effect from Au-
gust 26, 2013.
These items will attract customs duty at
35 per cent plus an education cess of three
per cent, taking the total import duty to
36.05 per cent.
This move will also help to boost demand
for domestically produced sets, given that
the local manufacturers have invested over
`1,500 crore in setting up facilities for flat
panel TVs.
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123
u Other measures: They include (i) allowing
public sector financial institutions to raise
quasi—sovereign bonds to finance long
term infrastructure, (ii) liberalising ECB
guidelines, (iii) permitting PSU oil com-
panies to raise additional funds through
ECBs and trade finance and (iv) liberalising
NRE/FCNR deposit schemes.
u Reduced limit of ODI: The RBI has reduced
the limit for Overseas Direct Investment
(ODI) by domestic companies, other than
oil PSUs, under the automatic route from
400 per cent of net worth to 100 per cent.
Oil India and ONGC Videsh are exempt
from this limit.
This reduced limit would also apply to
remittances made under the ODI scheme
by Indian companies for setting up un-
incorporated entities outside India in the
energy and natural resources sectors.
u The RBI reduced the limit for remittances
made by resident individuals under the
liberalized remittances scheme (LRS) from
$2 lakh to USD 75,000 a year. Resident
individuals are, however, allowed to set
up joint ventures or wholly owned sub-
sidiaries outside under the ODI route within
the revised LRS limit.
u Banks are exempted from maintenance of
statutory balance with the central bank
on incremental non-resident deposits (FCNR
and NRE) with a maturity of three years
and above. This would encourage the banks
to offer higher rate of interest to attract
cash flows from NRIs.
u The RBI has been selling dollars to arrest
rupee fall through State-owned banks.
However, tightening liquidity has increased
bond yield, resulting in Bank Nifty to fall
sharply. This has further weakened the sentiment
of the stock market.
Meanwhile, on 21st August 2013,Deutsche Bank
warned that Rupee could crash to 70 per Dollar:
We continue to believe that fundamentally the
Rupee is undervalued and has overshot its
equilibrium level substantially, but as numerous
episodes of past currency crisis have amply
demonstrated, under a scenario of deep
pessimism, currencies can overshoot substantially
and remain so for a long time. India we fear
is entering such a zone.
MARGIN OF ERROR
A widely debated issue is that why is India
singled out. The Economist [4] observed that:
“India is not being singled out. Since
May, when the Federal Reserve first said
it might slow the pace of its asset purchases,
investors have begun adjusting to a world
without ultra-cheap money. There has been
a great withdrawal of funds from emerging
markets, where most currencies have fallen
by 5-15% against the dollar in the past
three months. Bond yields have risen from
Brazil to Thailand. Some governments have
intervened.”
Presented below in Table 5 is Comparative
Currency Depreciation statistics of AEs and
EMDEs during April-August, 2013, which shows
that Brazilian Real (currency of another BRICS
nation) has depreciated more than the Indian
currency.
Table 5: Comparative Currency Depreciation
Currency Code Country 1-Apr-13 22-Aug-13 Decrease %
INR India 54.36 64.2165 18.14%
BDT Bangladesh 76.592 76.3768 -0.28%

124
BRL Brazil 2.019 2.4051 19.12%
EUR EU 0.78 0.7464 4.31%
GBP UK 0.6595 0.638 3.26%
IDR Indonesia 9.68 10.741 10.96%
KRW South Korea 1.088 1.117 2.67%
LKR Sri Lanka 126.675 131.782 4.03%
MYR Malaysia 3.0335 3.2881 8.39%
PKR Pakistan 98.35 102.262 3.98%
RUB Russia 31.0186 32.9919 6.36%
Yen Japan 94.16 97.5 3.55%
ZAR South Africa 9.2251 10.2018 10.59%
However, India asAsia’s third-biggest economy
is more vulnerable than most because of its
poor growth performance and high inflation.
Although India’s external debts are just 21%
of GDP, they are of short maturities. Total
financing needs (defined as the current-account
deficit plus debt that needs rolling over) are
$250 billion over the next year. India’s foreign
exchange reserves of $279 billion give a coverage
ratio of only1.1 (Refer to Figure 4). This pushes
India to higher risk trajectory.4
Moreover, tightening liquidity to arrest currency
fall would lead to further economic slow down
because of higher borrowing costs. Instead of
arresting currency fall, this could end up causing
further harm to the beleaguered currency.
•••
Figure 4: Reserve Coverage
1. India’s 1990-91 Crisis: Reforms, Myths And Paradoxes, Arvind Virmani December 2001, Planning Commission,
Working Paper 4/2001-PC.
2. India’s Trade Deficit: Increasing Fast but Still Manageable,AmitenduPalit, Institute of South Asian Studies in
National University of Singapore.
3. Macro-economics and monetary developments = First Quarter Review 2013-14, Reserve Bank of India, July
29,2013.
4. India in trouble :The reckoning - Why India is particularly vulnerable to the turbulence rattling emerging markets,
Aug. 24th 2013.
Currency Code Country 1-Apr-13 22-Aug-13 Decrease %
ECONOMY

Currency At Crisis

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