Impact
on Gold :
India currency devaluation has also resulted in surge of import by over 200% of
gold and silver. Statistics show that imports of gold and silver to India were
$8.96 billion a growth of 222%. The Reserve Bank of India purchased 200 tonnes
of gold from the International Monetary Fund in 2009. From the start of 2011,
some 30 banks in India have been granted permission to import gold and silver.
Further gold purchases are expected in coming months, as the Reserve Bank has
issued licenses to seven more banks to import gold and silver. Indian banks are therefore contributing to
the massive increase in demand for gold and silver. Chinese banks are also
catering to the increased demand of Chinese people for gold bullion for investment
and savings purposes. In fact, most of the world’s central banks are now
diversifying from major currencies such as the dollar and euro into gold. In
addition to India and China, these countries include Russia, Sri Lanka,
Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia. Financial experts
believe, the increased demand for gold and silver from India and wider Asia is
sustainable and that it will keep the precious metal market thriving.
Impact
on Stock Market :
As a result of de- valuation, Indian stock markets will face new threats. The
operators and participants were earlier concerned about domestic inflation rate
and the Reserve Bank of India’s economic policies. But the fall in the value of
Indian currency has taken aback all concerned. The investors are bound to
suffer as there is always a positive correlation between stock index and
corporate results.
Reason
for Devaluation :
1. Inflation: Firstly, the descend, in the rupee was assumed to have taken
place to adjust for the high inflation. But, as the rupee continued to go down,
apprehensions of further increase in the inflation have appeared.
2. Strengthening of Dollars :
Increase in global dollar value can also be attributed as one of the prime
reason for the fall in the value of rupee. The demand of dollars due to
economic crisis in other countries including Europe has also tremendously
increased the dollar demand. The Euro-Zone crisis has weakened the Euro
significantly against the US Dollar. In other words dollar is getting stronger
in the world markets. Obviously the investors are considering US as safe place
to invest in. There was also an increased demand for the dollar in the domestic
currency markets due to a flight of foreign funds from the domestic stock
markets.
3. Dollar Demand from Stock
Markets : Foreign institutional
investor’s withdrawal from domestic economy is the one big reason for this
depreciation. The Greece Crisis and its rescue package made investor to
re-think about their investments. Certain political changes and civil movements
are also the factors for foreign institutional investors to become net sellers
recently.
4. Fiscal Deficit: The growing
trade deficit and large fiscal deficit are also contributing to the fall in the
rupee valuations.
Political
View :
According to the Government, the reason for the current round of rupee
depreciation is related more to current grim global economic environment. The
currency of every other emerging economy (barring China that managed its
currency peg against the US dollar) is falling. The currencies of Russia, Brazil,
South Korea, and Indonesia have plunged by between 6% to 16%. So the 10% fall
in the value of rupee against the US dollar is hardly out of context. The
sovereign debt woes of European Union are shifting foreign investors from euro
assets to dollar assets. There seems to be no other alternative to US dollar.
RBI
Mechanics :
RBI is concerned and keeping close watch on the situation. Apart from direct
intervention in the currency markets, RBI has taken many other measures such as
relaxing external commercial borrowing norms by raising the ceiling on interest
rates. It has also increased the interest rate cap on foreign currency
deposits. The RBI has removed the USD 100 million cap on net foreign exchange
supply arising out of rupee swap transactions that banks undertake on behalf of
customers. In order to attract more foreign currency deposits, the RBI has
raised the interest rate ceiling. The spreads for NRE term deposits were
increased from 1.75% to 2.75% while those on FCNR (B) deposits were increased from
1% to 1.25 %.
Market
Forecast :
The wide-ranging perception in the financial market is that until the global
macroeconomic environment settles, the rupee will continue to be under
pressure. "India's external position has become increasingly vulnerable to
global risk appetite. Further weakness cannot be ruled out," Royal Bank of
Scotland said in a research note. The
rupee is down 14.80% on the year, with the closest loser among other Asian
units being the Thai baht, which has shed just 3.2%, followed by the Malaysian
ringgit that is down 3%.
The rupee's slither may continue
due to the decline in foreign exchange inflows and swelling outflows. The Euro
zone, the world's largest trading block and India's biggest trading partner, is
also in a deep crisis. In times to come, this zone has to stabilise to bring
some semblance of order to the global currency markets. Numbers of Indian scams
have also distracted government’s concentration away from economy. These scams
make the bad image of India in the global market.
At the end of G-20 summit in Seoul
recently, world leaders declared (in the
backdrop of the US demanding that Chinese currency Yuan should be appreciated
to check the Asian giant from taking advantage in international trade) “We will
move towards more market determined exchange rate system and enhance exchange
rate flexibility to reflect underlying economic fundamentals and refrain from
competitive devaluation of currencies. Advanced economies including those with
reserve currencies will be vigilant against excess volatility and disorderly
movement in exchange rates”.
Attending a meet in Seoul PM, Dr.
Manmohan Singh agreed to refrain from "competitive devaluation" and
bring in exchange rate flexibility to ensure that no country gets undue
advantage.
What Indian Government Can do, to
Bring back Positive Vibrations in Indian Economy?
1. Allow free flow of foreign
investment for the development of infrastructure and manufacturing sector.
2. Restrain / discourage import of
non essential and luxury items e.g. auto sector imports.
3. Interest rates may be increased
further on NRE and FCNR accounts.
4. Restrain /discourage export of
agricultural produce and basic minerals e.g. iron ore.
5. Promote aggressively exports of
manufactured goods like China
6. Promote migration of skilled
personnel / work force from India. We have them in plenty.
7. Facilitate the voluntary return
of the funds parked outside India.
8. Reduce / cut unnecessarily
expenditure of government institutions e.g. Indian Embassies. Ask them to
repatriate their surplus fund instead of calling funds from India. Many foreign
embassies in India are remitting their surplus to their home countries.
9. Government should observe
restraint in offering financial aid to other countries. We are yet not so rich.
Our people are still hungry and need night shelters.
Tapuriah Jain
& Associates
Chartered Accountants
21, Skipper House, 9, Pusa Road, New Delhi - 110 005
Tele : 91-11-28754012 & 13, Mobile : 91-98-100-46108, E-Mail : caindia@hotmail.com