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Friday, August 30, 2013

India's Rupee Keeps Falling and the Trade Deficit Keeps Widenin

Drop in India's rupee since the start of the latest quarter: -13.7%

It’s standard macro-economics: When a country’s currency declines, its exporters should soon get a boost as the lower currency makes their goods more competitive. By that rule, India should be enjoying an export boom. Since the start of May, the currency has dropped 23 percent, making it one of the world’s worst performers. Sure enough, exports did go up in July, rising 11.6 percent year-on-year, the best increase in more than 12 months.

Consumers worldwide shouldn’t expect to see a surge in Made-in-India products in the coming months, however. The July increase comes after a period of weakness: India’s exports dropped 1.8 percent in the 2012-13 fiscal year. And while the currency has been steadily weakening for two years, the decline of the rupee hasn’t helped narrow India’s current-account deficit. Instead, the trade gap has just gotten bigger, hitting 9 percent of gross domestic product in the first quarter. “The sustained and large depreciation of the [rupee] since mid-2011 does not appear to have had any near-term impact on the current-account deficit,” Mumbai-based Goldman Sachs economist Tushar Poddar wrote in a report published on Aug. 26. Chances of a short-term rebound driven by a weaker currency are “doubtful,” he added.

One culprit is rising prices inside India, with the consumer price index jumping 9.6 percent in July. India’s high inflation undercuts the competitiveness gains from depreciation, says Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai. “Exports are unlikely to get any significant boost,” he says. “Any benefit [from the weak rupee] will be offset by the fact that there is a huge inflation problem in India, and the cost of manufacturing is very high for local companies.” Rising costs of raw materials are making business challenging for Rajesh Mehta, chairman of Rajesh Exports, a Bangalore-based producer of gold and diamond jewelry. “There is no big benefit for exporters,” he says. “A stronger and a stable currency is always better for businesses.”

For Indian exports to boom, local exporters need trading partners with healthy economies. There aren’t many of those around, making an export-led recovery difficult, according to Raghuram Rajan, the chief economic adviser who in September will take over as the country’s central bank governor. “The whole world is in a slow-growth phase, and it is going to be hard to increase market share in this environment,” Rajan told Bloomberg Businessweek in a March interview. “It is harder than in normal times.”
India’s structural problems also make it harder for local exporters to cash in on the weak rupee. Although information technology outsourcers such as Tata Consultancy Services (TCS:IN) and Infosys (INFY) have grown, thanks to low-cost workers in Bangalore and other Indian cities, the country’s manufacturers have suffered from India’s sorry history of underinvesting in ports, roads and other infrastructure. The “infrastructure deficit,” says Moody’s Investors Services sovereign analyst Atsi Sheth, “lowers growth potential and discourages foreign direct investment.” That’s one reason India, unlike China and other Asian neighbors, is not a big exporter of computers, consumer electronics, toys, or sporting goods.

There are grounds for optimism. The government is aware of the structural problems and wants to make large investments to improve infrastructure in a manufacturing “industrial corridor” between Delhi and Mumbai. Higher costs in China, meanwhile, are leading some labor-intensive manufacturers to look for alternatives in Asia, creating “a huge opportunity for India,” says Said S. Gopalakrishnan, president of the Confederation of Indian Industry. To take advantage of the opening, he says, India needs to revise rules that make it difficult for large employers to hire and fire workers. “Labor regulations must be placed back on the table for mass manufacturing,” he says.

With national elections due next year, though, such politically charged reforms are unlikely. Instead, Prime Minister Manmohan Singh and the ruling Congress Party are focusing on ways to win over voters in the countryside. The government won a victory on Aug. 26 with the lower house of Parliament approving a plan to provide subsidized grain to two-thirds of India’s 1.2 billion people. That might help Congress stay in power next year, but it also increases concerns that the government is backtracking on promises to cut the budget deficit. Over the past five months, there have been “clear signs of a reversal” in India’s austerity program, DBS warned in an Aug. 27 note, with second-quarter expenditures up more than 28 percent year on year, compared to a budgeted 16.4 percent increase.

Reason For Indian Rupee to Fall Against US Dollar

Indian Rupee has depreciated almost 50% in last 2 years. Since quite a couple of days it has been falling fanatically. I am all curious about a lot of thing in this matter. I have a lot of question to be answered:

·         Who defines the currency rates
·         Why is India Rupee Falling
·         What is the impact of this depreciation to Indian economy and common man

There are certain banks which are allowed to exchange different currencies of the world. These banks define the rate of each currency based on simple economic calculation “Demand and Supply”. Now if Demand of Dollar is more compared to Indian Rupee then INR will depreciate and vice versa.
These are the two factors that derive the Demand of a currency.

1)      Economic situation of the country
2)      Export and Import Deficit

But more importantly speculation plays a major in deriving price.

If we take India as an example we import oil from different nations but the payment is done in US Dollar.  We can earn this dollar by either exporting goods to different countries or by buying it from banks.  If we have to buy the dollars from bank then it will depreciate our Rupee value.

Now the most important question is what the impact of these currency fluctuations is in our day to day life. Well Again the answer is all the things that are directly dependent on Imports would become costlier and all the things that are dependent on Exports would be Cheaper. Example Oil, Gold, Telephones etc will become costlier and Services to US and textile industries would thrive from this situation.



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