Macroeconomic Factors affecting

USDINR

Concepts-FactsAnalysis

Introduction
Rupee started depreciating after the perception of Greek Default Starting from Greece, Ireland, Portugal, Spain and more recently Italy, these euro zone economies have witnessed a downgrade of the rating of their sovereign debt, fears of default and a dramatic rise in borrowing costs. These developments threaten other Euro zone economies and even the future of the Euro Additionally political crisis in Middle East inflating the crude prices.

Demand Supply Concept

SNo CAUSE EFFECT

1 2
3 4 5 6

FII pull out money so they sell Re

Supply for Re Rises

Global sentiments & EURO crisis leads overseas Supply for Re Rises investors to sell in India and buy $ as safe haven.
High inflation decreases purchasing power against other currency Demand for Rupee decreases.

Current a/c deficit makes us Net debtor to rest of Supply for Re Rises the world. Political Instability hits foreign investors sentiments negatively. RBI Selling$ from its forex reserves to stabilize rupee. During Fy11-12 (april-dec)
Exports = US $ 217.7Bn= 25.8% Growth Imports = US $ 350.9Bn = 30.4% Growth TradeDeficit = US$ 133.3Bn V/s 96.2Bn= 38.5% Rise

Investments inflow decreases. No significant effect but decrease in forex reserves. Demand for $ increases.

Rise in Fiscal deficit results in to more external aids and borrowings.

Demand for $ increases.

Factors Affecting USD/INR

1. 2. 3. 4. 5. 6. 7. 8. 9. Economic performance of the economy- GDP GrowthForeign capital flow Inflation & Interest rate in the economy. Balance of payment position of the economy- Current Account deficit-FDI Inflows Fiscal position of the economy - Fiscal deficit & Its Causes Performance of the stock market - Equity markets and FII flows Efforts of the central bank in managing the exchange rates Political stability Global Currency Trend Correlation to movements in EUR and broad USD Index Broad movement of peer currencies Oil Prices

Due to Lower Agriculture & Industrial Growth the overall GDP is affected.
Source - http://planningcommission.nic.in/data/datatable/0904/tab_2.pdf planningcommission.nic.in

Economic performance of the economy

GDP Inflation Repo

GDP is showing a slowdown QoQ & IIP Data following similar trend in the industrial production YoY.

3 Factors behind High Inflation: High food price inflation as demand outpaced supply- Fall in agriculture output Manufacturing slowdown.(IIP Chart) Rising global commodities prices of food, Industrial material are transmitted to domestic prices in Cost-Push manner. Results High interest rates and increase cost of Manufacturing, 2007-08 , 18.4 borrowing abounds. Manufacturing, General, 2007-08 2006-07 , 15.0 General, 2006-07 , 15.5 This is a vicious cycle. , 12.9 Manufacturing, Mining & The rate of inflation, last reported in Manufacturing, General, 2005-06 2005-06 , 10.3 General,Electricity, 20112010-11 Quarrying, 2009Electricity, Mining Mining & , 9.0 Mining & 2006- & 20072010-11 , 8.2 , 8.6 March 2012, is close to the double-digit Electricity, 12 , 8.2 Electricity, 10 General, 2009, 7.9 , 7.3 2009-10 Quarrying, 2010Electricity, 2005- 07 Quarrying, 2007-Mining & Manufacturing,Electricity, 2010Quarrying, 200608 , 6.3 Mining & 10 , 6.1 levels of 9.5 per cent. 5.3 11 11 , 5.5 06 , 5.2 , 5.2 07 Manufacturing, 08 , 4.6 Quarrying, 2008-2008-09 ,, 4.8 , 5.2 General, 2011-12 Electricity, 2008General, 2009-10 Manufacturing, Quarrying, 200506 , 2.3 09 , 09 2.5 2.6 2.5 2008-09 ,,,2.7 2011-12 , 2.9 , 2.8 Mining & Quarrying, 201112 , -2.0 Mining & Quarrying Manufacturing INDUSTRIAL PRODUCTION Electricity General GROWTH RATES

www.rbi.org Central Statistics Office (CSO), Government of India.

Foreign Capital flow

Net FII Inflow 01-Jan-11

Fall in Net FII Investments & FDI Investments.

Manufacture

FDI Break up FY 2010-11

Construction Financial Services Real Estate Activities Electricity and other Energy Generation, Distribution & Transmission Communication Services Business Services

Foreign Investment Inflow

Direct investment Portfolio investment Total (A+B)

Miscellaneous Services

Manufaturing Construction

Financial Servies

www.rbi.org
Source- SEBI

Balance of Payment position of the economy

Trade Bal= Merchandise (Exports-Imports)
Oil Non-Oil Total
Fig indicated are -ve
Petroleum, Crude and Products Gold and Silver Total Imports /All Commodities

US $ mn

There is 46.2% hike in petrol bill & 44.4% in gold imports Petroleum products are 69% of total import bill
KEY COMPONENTS OF INDIA'S BALANCE OF PAYMENTS - US $
Net Current Account (In USD $Mn)

I. Trade balance II. Current account III. Capital account = Foreign Invst + Comm Borrowings + Re Debt Ser + NRI Dep Overall balance (II+III)

Net CA = Trade bal + Invisibles

Fiscal position of the Economy : Govt. revenue inflows not in pace with its expenditure outflow
Gross fiscal deficit (Rs in Cr)

After targeting a fiscal deficit 4.6 per cent of (GDP) for this fiscal year it is at 5.9 per cent..?

REASONS :-

71000cr of revenue loss in petroleum sector = .8% of GDP. Fertilizer subsidy increase by 17200cr to boost agri output due to lower output in previous yr. Provision for food subsidy increased by 12250cr Total of 3 subsidy = 100451 Cr = 1.1% of GDP o

Short term debt to total debt on residual Maturity basis

Drop in growth rate resulted into net tax revenue = 22800cr =.3% of GDP o Due to volatile capital market Govt had to recalibrate its disinvestment program and accordingly 13895cr has been estimated against 40000cr. Total slippage in revenue 149356 Cr = 1.7% of GDP.
Net Aid (US $Mn)

2004-05
Short-term Debt* to Total Debt Short-term Debt* to Foreign Currency Assets Concessional Debt to Total Debt Total External Debt to GDP

Source : Ministry of Finance & Reserve Bank of India

Efforts of the central bank in managing the exchange rates

FII flows in Indian markets Forex Reserve
SDR (USD Million)
GOLD (USD Million) Forex (USD Million) Reserve Tranche Position (USD Million) Total (USD Million)

RBI intervention in Forex markets

RBI conducted USD selling interventions in the spot during Nov Feb for USD 20.5 bn CRR reduced to 75bps,Repo Rate cut to 50bps & Reverse Repo rate cut to 50bps.

Source www.rbi.org

Global Currency Trend

INR moving in line with other EM currencies.

Currencies in BRIC nations also depreciating and maximum effect is seen in South Africa but reverse effect in China.

Source : Bloomberg

Economic conditions in Global Scenario

Current A /c to GDP(%) in Major Countries & BRIC Nations
Debt to GDP In Major Countries & BRIC Nations

Germany

GDP % Interest rate Inflation GDP-Int rate & Inflation in Major Countries & BRIC Nations Interest rate, GDP %, China,rate, rate, Interest Interest Brazil, 8.5 Inflation, India, 8.1India, 8Russia, 8 7.55 Interest rate, China, 6.31 Inflation, Brazil, GDP %, Russia, GDP %, India, 5.3 GDP %, 4.99 4.9 Inflation, Russia,rate, Austraila, 4.3 Interest Inflation, China, 3.6 GDP 3.5 Japan, Austraila, %, 3 Inflation, UK, 2.8 2.7 Inflation, USA, GDP %, GDP %, Canada,Inflation, Inflation, France, Inflation, GDP %, USA, 2 Inflation, 1.7 1.9 Interest2 Germany, Interest Interest %, rate, GDP rate, 1.7 1.8Germany, rate, Brazil, Austraila, 1.6 Canada, Inflation, Japan,rate, %, France, UK, Interest Canada, 11.2 Germany, 0.8 1 GDP Interest 1 France, rate, Interest rate, 0.4USA, 0.25 0.33 0.5 GDP %, UK, 0 Japan, 0

The US, the worlds largest economy is struggling. UK has announced a double-dip recession and the end of the Euro zone crisis is nowhere in sight. China is dealing with wage increases, pressure to allow its currency appreciate and issues with overcapacity. Sanctions on Iran will also mean that oil prices may spike leading to further economic pressures. Any global crisis means the availability of credit will become tight leading to a squeeze in investments and less borrowing to fund any projects for both government and private sector
Source-tradingeconomics.com

Political Stability
The verdict in the state elections and increasing pressure from its coalition allies means that the government cannot go ahead with much needed reforms. FDI in retail, aviation and other sectors in the parliament has stalled because the ruling UPA is unable to make any decisions with its back against the wall and facing the prospect of an early election of it refuses to toe the populist line. The much-awaited goods and service tax (GST), decontrolling of diesel prices, have all been put on hold. Not wanting to antagonize the electorate or its coalition allies, expect the UPA to trudge along without making any policy changes that can propel the economy forward

Appreciating Depreciating Rupee Rupee Cause-Effect-Solutions

Money supply increases, so cost of borrowing reduces = growth of industries = rise in GDP = Investment Opportunities
Affects GDP, Increases Inflation, Increases Interest rates leading to high cost of borrowing (Encouraging ECB) and decreases output = Lack of growth Opportunities.

Global crisis 0r Lack of growth

opportunities
leading to negative foreign inflow

Wait until Euro debt issue is resolved as investments across the world are interlinked & investors are now buying $ as save haven instead of Gold
Increases the CAD as outflow exceeds inflow = Demand for $ leading to depreciating Re.

Once Re appreciates the oil import bill will reduce resulting in to lower cost of input & output prices = more savings leads to increase in money supply

Cost of Input goods goes up leading to increase in prices of output products = More spending & less savings that disturbs liquidity system in economy.

Oil Imports remaining high leading to huge payments due to depreciating Re

Policy measures to be taken on political front leading to growth opportunities to attract foreign investments = Raises demand for Re

Thank You

Tamanna Edmund Keen

Economist Planner-CFA-CWA(Final)

School Of Planning, CEPT University, Ahmedabad.