Indian Rupee
Dr HK Pradhan
XLRI Jamshedpur
Indian Rupee
• Exchange Rate Policy During British Rule
– Sterling
St li Link
Li k in
i 1927 : £ = R
Rs 13
13.33
33
• Re Devaluation from £= Rs 13.33 to Rs 21.0
on June 6,
6 1966
– US Dollar fell too: $1 = Rs 4.76 to Rs. 7.50
Indian Rupee
• Basket Peg in September 1975-1992
• Rupee devalued from £1 = Rs.34.36 to Rs.41.59 in July 1991
– Rs-US $ rate devalued to $1=Rs 25
• Partial Convertibility with dual exchange rate in March 1992
– Re q
quoted at Rs 30 in the market and Rs 25 as official rate
• Exchange rates unification since 1993
– US dollar replaced pound sterling as intervention currency
• Current Account Convertibilityy achieved in Aug
g 1993
– Article VIII, Sec 2(a) of the IMF: No member shall, without
the approval of the Fund, impose restrictions on making
payments and transfers of current account
transactions Members can effectively limit capital A/C
transactions…Members
convertibility
Moving
g towards convertibility…
y
Several other measures affecting rupee
convertibility
bl
Rupee made convertible under current account
liberalization of FDI
FIIs allowed in Indian stock and bond markets
Euro equities allowed for Indian companies
freedom of trade invoicing in major hard currencies
foreign exchange account for exporters
liberalization of gold movements
FCNR accounts in banks based on free market rates
liberalization of rupee trade area
internatioal investments gradually being opened up
India’s Managed Exchange Rate System
• Indian follows a managed
g floating
g rupee,
p ,
despite the claim that Rupee is a floating
currency
• Trades
T d actively
i l in
i spot & fforward
d markets
k
• Announces indicative rates against few
currencies
• FX interbank markets are influenced by
policy
pol
cy measures
easu es influencing
lue c g money
o ey markets,
a ets,
repo markets
• RBI is a major trader on the market
• RBI does intervene in spot/forward forex
markets
Indian Foreign Exchange Markets
Thin Foreign Exchange Market
US dollar is actively traded in the Indian foreign
exchange markets
USD is the base currency, euro has assumed greater
significance though
Spot INR/USD rates are determined by demand and
supply factors, subject to RBI interventions
g extent based on
INR/Non Dollar Rates to a large
cross rates in India and overseas markets
Demand vs Supply Factors
Demand (Outflows)
• Imports
I
t
• Remittances
• Aid, Grants
• Tourists
• FIIs
• Euroequity
• Loan Repayment
• Overseas Investment
Supply (Inflows)
• Exports
E
t
• Remittances
• Aid, Grants
• Tourists
• FIIs
• Dividends
• New Loans
• FDI
Determination of Indian Rupee
• Demand - supply imbalances will be reflected in either
exchange rate changes or reserve movements or both
•
•
•
•
•
•
•
RBI may or may not intervene in the markets
May also have in implicit Rupee- US Dollar target
Speculators have become active in the Indian market
Exporters/importers resort to lead/lag strategy
Cancellations of forward contracts add liquidity
Foreign exchange and money markets getting linked
Inflation and interest rate differential between home
and abroad have become important
Forex Reserves
Trends in Rupee
India’s exchange rate crisis 1991
p under Asian Crisis: 1997
Rupee
Falling Rupee during Aug 2000
g Rupee
p in 2008
Rising
Falling Rupee in early 2009
Rising rupee in 2010
2010-11
11
Falling rupee October-November 2011
Spot USD-INR – Issue of correct data for VAR
Falling Rupee
Change in market structure for US$/INR
Increased volatility as estimated by time series post Jul 95 after RBI
allowed INR to ‘float’
01
/0
1
01 /20
/0 06
3
01 /20
/0 06
5
01 /20
/0 06
7/
01 200
/0
6
9/
01 20
/1 06
1
01 /20
/0 06
1
01 /20
/0 07
3/
01 200
/0
7
5/
01 20
/0 07
7
01 /20
/0 07
9/
01 200
/1
7
1/
01 20
/0 07
1
01 /20
/0 08
3
01 /20
/0 08
5
01 /20
/0 08
7/
01 200
/0
8
9/
01 20
/1 08
1/
20
08
55
53
51
Rise & Fall of the rupee
49
47
45
43
41
39
37
35
54
Rise of the Rupee
52
50
48
46
44
42
40
Thank You