Analysis of Depriciation of Value of Indian Rupee Comparison To Us Dollor

“ANALYSIS OF DEPRICIATION OF VALUE OF
INDIAN RUPEE COMPARISON TO US DOLLOR”
BY – SARTHAK NEEMA
[Roll No: C018]
A research paper submitted in partial fulfillment of the requirements

for the degree of
BBA LLB – SEMESTER II
SVKM’s NMIMS – KIRIT P. MEHTA SCHOOL OF LAW
2018-2019
Approved by
Professor – Debjani banerjee

What is An Exchange Rate?
In Simpler terms an exchange rate is the value of one nation's currency versus the currency of
another nation or economic zone. For example, how many U.S. dollars does it take to buy
one euro?
Types of Foreign Exchange Rate-
 Flexible Exchange Rates or Floating Exchange Rate-First of them is the flexible

exchange rate which means that Most exchange rates are determined by the foreign
exchange market, or forex. Such rates are called flexible exchange rates. For this reason,
exchange rates fluctuate on a moment-by-moment basis. The three most important are the
central bank’s interest rates, the country's debt levels, and the strength of its
economy. India is the Example of this type of exchange rate.
 Fixed Exchange Rates-When a country's currency doesn't vary according to the forex
market, it has a fixed exchange rate. The country makes sure that its value against the
dollar, or other important currencies, remain the same. It buys and sells large quantities of
its currency, and the other currency, to maintain that fixed value. For
example, China maintains a fixed rate. It pegs its currency, the yuan, to a targeted value
against the dollar.
How Are Currency Exchange Rates Determined in India?
India has a floating exchange rate system where the exchange rate of the rupee with another
currency is determined by market factors such as supply and demand Apart from supply and
demand, the following 5 factors are widely agreed upon as being the driving force determining
the exchange rate of a currency;
1. Inflation in the country-The price of goods or services will increase if they become rare (less
supply, same or increased demand) or if money is in greater supply in the economy. This is what
is called inflation. Inflation brings about a fall in purchasing power of the currency and thus its
value.
2. Interest rate or repo rate- A higher interest rate would mean investors would rush to buy
government bonds as the returns would be higher. The rupee will be in more demand and its
value will increase. However, the downside of a higher interest rate would be that when banks
are lending the money to people, they would charge an even higher interest rate than what RBI
charges them, to make a profit on their loans. This might discourage people who want to start a
business or take a loan to buy a house, car, or for their education. Without the flow of capital in
the form of loans, the economic activity of a country may get stifled and slowed down.
3. Level of current account deficit-A current account represents a country’s foreign

transactions. Current account deficit implies that a country is spending more money on importing
goods and service from abroad than earning money via exports. Since importing of goods and
service is more than exporting, and imports have to be paid in foreign currency, this increases the
demand for that currency and hence its value appreciates with respect to the rupee. If the vice
versa was the case where exports are greater than imports, then the value of the rupee will
appreciate with respect to the foreign currency.
4. Amount of public debt-If a country has a high level of budget deficits and is borrowing to
cover this cost, then it would result in lower currency valuation. How does this happen? A
country with a huge amount of public debt carries a very high risk of inflation. It must either
print new currency to pay off its debts (which again increases inflation) or increase the sale of
securities to foreign investors, hence lowering their prices. If the debt is too large and investors
are not confident in the country’s ability to pay back its debts, then they will not be willing to
buy securities denominated in that currency. Thus, inflation will go up and currency valuation
will go down.
5.Recession-When a country experiences a recession, its interest rates are likely to fall,
decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison
to that of other countries, therefore lowering the exchange rate. This what results due to
recession in 2008 American faces recession which leads to fall in value of dollar
6. Speculation-If a country's currency value is expected to rise, investors will demand more of
that currency in order to make a profit in the near future. As a result, the value of the currency
will rise due to the increase in demand. With this increase in currency value comes a rise in the
exchange rate as well.
How Foreign Exchange Markets Run?

In the retail currency exchange market, a different buying rate and selling rate will be quoted by
money dealers. Most trades are to or from the local currency. The buying rate is the rate at which
money dealers will buy foreign currency, and the selling rate is the rate at which they will sell
the currency. The quoted rates will incorporate an allowance for a dealer’s margin (or profit) in
trading, or else the margin may be recovered in the form of a commission or in some other way.
Different rates may also be quoted for different kinds of exchanges, such as for cash (usually
notes only), a documentary form (such as traveler’s checks), or electronic transfers (such as a
credit card purchase). There is generally a higher exchange rate on documentary transactions
(such as for traveler’s checks) due to the additional time and cost of clearing the document, while
cash is available for resale immediately.
FOREIGN EXCHANGE RATES IN TERMS OF US DOLLARS OF INDIAN RUPEE AND

IN TERMS OF RUPEE OF US DOLLORS
US DOLLARS INTO INDIAN INDIAN RUPEE INTO US DATES

RUPEES DOLLARS
1 USD = 69.0052 INR 0.0145 USD = 1 INR on 26/03/2019
1 USD = 69.7149 INR on 01/01/2019

0.0143 USD = 1 INR
1 USD = 73.7673 INR 0.0136 USD = 1 INR on 01/10/2018
1 USD = 68.4933 INR 0.0146 USD = 1 INR on 31/07/2018
1 USD = 68.4926 INR 0.0146 USD = 1 INR on 15/05/2018
1 USD = 65.0746 INR 0.0154 USD = 1 INR on 31/03/2018
1 USD = 63.8819 INR 0.0157 USD = 1 INR on 01/01/2018

1 USD = 64.5241 INR 0.0155 USD = 1 INR on 01/07/2017
This Graph Explains what are the changes in exchange Rate in years between 2017- 19
Why Indian Rupee Value May Further Fall In near future with respect to US Dollars or
what Is the reasons because of which there is Fall in value of Indian Rupee in terms of US
Dollars-
 HIGH CRUDE OIL PRICE

1. As we all know that India produces just 20% crude oil of her requirement and rest is
imported from the other countries like Iraq, Saudi Arabia, Iran and other gulf countries.
Crude oil is the biggest contributor in the import bill of India.
2. According to a January report from energy research and consultancy firm Wood
Mackenzie; The daily fuel demand of India is expected to more than double to 190,000
barrels in 2018, up from last year’s 93,000 barrels.
3. As the demand of crude oil is increasing the bill of oil import is also increasing.
4. Data published by the Petroleum Planning and Analysis Cell (PPAC) points that India’s
total crude oil import bill in the current financial year (2018-2019) is expected to jump
24% to $109 billion from $88 billion last fiscal year.
5. Economic survey 2018 estimates that if the price of crude oil increases 10 dollar per
barrel then the GDP of India decreases up to 0.2-0.3 percent.
6. So, increase in the demand of crude oil will be followed by the increasing import bill in the
form of payment of more dollars to oil exporting countries. Hence the demand of dollar
will increase in the Indian market which will reduce the value of Indian rupee
 FPI WITHDRAWLS
Overseas investors pulled out a massive Rs 21,000 crore ($3 billion) from the capital markets in
September, making it the steepest outflow in four months, on widening current account deficit
amid global trade tensions. The latest withdrawal comes following a net infusion of close to Rs
5,200 crore in the capital markets (both equity and debt) last month and Rs 2,300 crore in July.
Since the beginning of this year, FPIs have withdrawn Rs 63,864 crore from Indian markets,
putting pressure on the Indian currency which is down over 13 per cent during the same period.
Outflow of funds from the Indian market leads to a fall in the value of rupee since there is more
demand for dollars from foreign investors after exiting the Indian market.
 High Real Effective Exchange rate

The Real effective exchange rate (REER) signals the competitiveness of a country's
currency in comparison to a basket of currencies, adjusted for inflation effects.
It calculates the purchasing power of a currency by adjusting the nominal exchange rate
for inflation effects. When the currency is overvalued, domestic prices are higher by
international standards and domestic producers are not competitive. When the currency is
undervalued, domestic prices are lower by international standards and domestic
producers are more competitive than their foreign counterparts. Since, the currency is still
overvalued after falling nearly 13 per cent on a year-to-date basis, chances are high that
rupee may fall further in order to become fairly valued.
 Increasing Trade Deficit of India: A situation, in which the import bill of a country
exceeds its export bill, is called trade deficit. Indian merchandise trade deficit of $157
billion in 2017-18 was the widest since 2012-13. In the FY 2012-13, the country had
reported a merchandise trade deficit of $190 billion. Trade deficit was around was $ 118
billion in the FY 2016.It’s simple mean is; outflow of foreign currency is more from Indian
market as compared to inflow of foreign currency. As per the law of demand; if the demand
of a commodity increases, its price also follows it. In the same way; when more and more
foreign currency i.e. dollar goes out of Indian market, its domestic price increases and the
price of Indian rupee decreases.
 Federal Reserve Rate Hike
The Federal Reserve raised a key interest rate for the third time this year in response to a
strong US economy and signaled that it expects to maintain a pace of gradual rate hikes.
The Fed on September 26 lifted its short-term rate - a benchmark for many consumer and
business loans - by a quarter-point to a range of 2 percent to 2.25 per cent.
It was the eighth hike since late 2015. A rate hike by Federal Reserve will lead to a rise in
US treasuries yield and act as an incentive for foreign funds to park their money into the
US markets since they will get higher returns for their investment.
This will lead to foreign fund outflows from the Indian market as rate hike will lower
investment returns for foreign investors and prompt them to sell. That will be bad news
for rupee since the dollar will become stronger in the global currency market.
Conclusion:
So the major conclusion can be drawn from this is that All of these factors determine the foreign
exchange rate fluctuations. If you send or receive money frequently, being up-to-date on these
factors will help you better evaluate the optimal time for international money transfer. To avoid
any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will
guarantee that your currency is exchanged at the same rate despite any factors that influence an
unfavorable fluctuation.

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“ANALYSIS OF DEPRICIATION OF VALUE OF

INDIAN RUPEE COMPARISON TO US DOLLOR”

[Roll No: C018]

A research paper submitted in partial fulfillment of the requirements

BBA LLB – SEMESTER II

SVKM’s NMIMS – KIRIT P. MEHTA SCHOOL OF LAW

Professor – Debjani banerjee

Types of Foreign Exchange Rate-

 Flexible Exchange Rates or Floating Exchange Rate-First of them is the flexible

3. Level of current account deficit-A current account represents a country’s foreign

How Foreign Exchange Markets Run?

FOREIGN EXCHANGE RATES IN TERMS OF US DOLLARS OF INDIAN RUPEE AND

US DOLLARS INTO INDIAN INDIAN RUPEE INTO US DATES

1 USD = 69.0052 INR 0.0145 USD = 1 INR on 26/03/2019

1 USD = 69.7149 INR on 01/01/2019

1 USD = 73.7673 INR 0.0136 USD = 1 INR on 01/10/2018

1 USD = 68.4933 INR 0.0146 USD = 1 INR on 31/07/2018

1 USD = 68.4926 INR 0.0146 USD = 1 INR on 15/05/2018

1 USD = 65.0746 INR 0.0154 USD = 1 INR on 31/03/2018

1 USD = 63.8819 INR 0.0157 USD = 1 INR on 01/01/2018

 HIGH CRUDE OIL PRICE

 High Real Effective Exchange rate

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