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Indian Rupee Volatility: Causes And Effect On Indian Merchants

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Introduction

This paper concise the causes of INR volatility and its consequences and its impact on Indian merchants. In the above data, we can see that in March 2018 the yield was -0. 15 and after July 2018 the value of INR only decreased. The clip is showing how the railway minister Piyush Goyal passed a statement about INR Depreciation on 5 October 2018- But Minister Piyush Goyal was comparing the current INR value against USD to 2013 peak value that was 1 USD = 69 INR at that time, but when we compare the INR value of 9 October 2018 with 2014 when the Indian government was changed into BJP then the depreciated percentage is 25. At the time of Independence, 1 USD was equal to 1 INR, now in October 2018, 1 USD is equal to 74 INR.

The clips given below will enlight how the value of INR is deteriorating- Causes and Consequences of INR depreciation-Crude oil price-Only 20% crude oil is produced in India and rest 80% is imported from Iraq, Saudi Arabia, Iran and other gulf countries. the biggest contributor in the import bill of India is Crude oil. The Petroleum Planning and Analysis Cell (PPAC) is published the data pointing that crude oil importing bill is expected to reach 24% to $109 Billion (2018-2019) from $88 billion last fiscal year. The GDP of India is expected to decrease up to 0. 2-0. 3 per cent if the crude oil price increases by 10 dollars per barrel, estimated by an economic survey. Import Bill of India is heavily dependent on demand for crude oil and crude oil demand in Indian Market will lead to the decrease in the value of Indian rupee. There are other factors also like politics.

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For example, Us president Donald Trump passed the statement to cut off all oil imports from Iran countries on November 4. As India is the second largest importer of Iranian crude oil after China can’t comply with the US sanctions because of many benefits provided by Iran like practically free shipping, extended credit terms and significantly cheaper oil than any of its competitors i. e. Saudi Arabia and Iraq and other Gulf countries. The geographical proximity factor also can’t be avoided to defy Trump directive. Excise Duty was cut by the Indian on 5 October 2018, hence the consumers got relief to the tune of Rs 5 per litre of petrol and diesel.

Huge Trade deficit-According to Bloomberg Quint site in April 2018, the data of commodity was posted showing how the trade bill was affected by the huge import of petroleum and crude oil and reducing the petroleum product by 13. 22 per cent.

According the data released by the commerce ministry in April 2018, the export and Import gap widened by 28. 5 percent from 2016 to $13. 7 billion in the month of March 2018, reaching the annual deficit to $87. 2 billion. In July 2018, Economics times stated that in more than 5 years in June the trade deficit widened to its highest as it was highly affected by the import of oil. Though the increasing per cent of merchandise export was 17. 57 per cent year-on-year in June, the trade deficit widened to $16. 6 billion, its highest as it was highly affected by the import of oil that surged 56. 61 per cent to $12. 73 billion. In this graph we can see, the change in imported value (in $ billion) is comparably high than the change in exported value (in $ billion).

The above clip is from economics times August 14, 2018 believed that the increasing in import bill is highly affected by importing oil over 57 percent and 41 per cent increase in gold import. It became the main reason behind the trade deficit to reach $18. 02 billion in July. Withdrawal of Foreign Investors from India-“Exit India” lead by FII is one of the main reasons for depreciation of INR. As it is reported by the report of the quint news that the amount of money that has been withdrawn from India in the first five months of 2018 is Rs 32078 crore that is a very large amount comparing to the amount of money that had been left during the financial crisis was Rs 26480 crore by the foreign investors.

There are many reasons for the investor of not trusting the Indian Market and they are following-

  1. Highly chance of the further increase in Petroleum, INR will more depreciate that will lead to less return to the investors.
  2. The government will be pressurised to give MSP to the farmers, so the Indian government have to borrow money from the market that will lead to less liquidity in the market.
  3. Political uncertainty and instability in the election year as NDA popularity is decreasing. The money of investors will trap if the new government comes in the power and change the NDI and other policies.
  4. Rising Interest rate in the US, is another factor that is attracting the investors.
  5. Red tape or market conditions- Global metal major players like ArcelorMittal, POSCO and the Vedanta group had scrap many projects of million worth due to market condition and significant delays in acquiring land. The amount of money that has been withdrawn by FII is from debt market i. e. estimated to 95 per cent of the total of 32000 crore which is equal to 29000 crores.

The withdrawal from the debt market will slow the long-term development of the country. Earlier, mainly the outflow was from the share or equity market. INR has affected Importers and Exporters-When INR value is depreciated- Import will become costlier and exporters will be benefited. If the importers are pessimistic about the INR value i. e. value of INR will depreciate further in future then importers will rushed to buy dollars so that they will able to pay the credit amount to the overseas sellers and will able to avoid the extra loss in order to hedge their position.

So again, the demand for dollars will be hiked resulting to depreciate the INR. And If the reserved dollar is kept or hold by the exporter, speculating that there will be more fall in INR in future, the demand for dollars will be hiked resulting to depreciate the INR. But again, there will be miscommunication that depreciated INR will boost the Indian export. In 2013, there were five countries that were announced emerging market economy (EME) – India, Turkey, South Africa, Indonesia, and Brazil ‒ were described as ‘fragile five’. Due to the threat from the reversal of Quantitative Easing (QE)program as they were facing the alike financial risks. QE is a mere hint by the then US Federal Reserve Chairman Ben Bernanke that the Fed may phase out its asset purchase program. Considering of four factors by Madhyam Organisation to highlight why exports can’t boost when INR has been depreciated-First, the continuous fall of INR is not unique to India.

The currencies of many other EMEs are also devaluing simultaneously. Few competing EMEs have seen the great depreciation like Turkish lira and the Argentine peso have depreciated drastically since April 2018. But when we compare INR with other Asian currencies such as Philippine peso, the Indonesian rupiah or Chinese yuan, then in Asia, INR is the worst-performing currency with depreciated value about 8 per cent since the beginning of 2018. In such a scenario, the continuous INR depreciation is not likely to boost India’s exports. Second, the INR depreciation had no significant positive impact on Indian exports because forex reserves, fiscal balance, current account balance and real interest rates also play direct or indirect roles to determine the value of currencies. Third, a large fragment of Indian exporters (such as gems and jewellery, chemicals, and textiles) has a high import force because of their reliance on imported inputs or resources.

For such export items, any profit from a depreciated INR will be even by higher expenses of imported sources. Fourth and more importantly, INR depreciation is highly affected by the global market. When the global demand is sluggish, it is not easy to stimulate exports through currency depreciation.

Conclusion

Depreciation of INR does not only affect economic growth indicators but also the pride of a nation. The government should also build the trust on investors and make them feel secure by doing their project on time, by giving the attractive return or when uncertainty, the sluggish market situation arises so in future they will not pull out their money. Depreciation can also be reduced by reducing the trade deficit. To appreciate INR, importation of crude oil should be reduced and other means of fuel for the vehicle like electric vehicles will be introduced by Indian automobile. According to the NITI Aayog report- Because of electric vehicles, 156 mega toes in diesel and petrol consumption for a year will reduce. The constraint on crude oil importation will be helpful to save crores of crores INR.

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