Abstract: This paper attempts to study the factors driving the Rupee exchange rate and reasons for its sustained
depreciation over the period since 1993. A statistical analysis is carried out to identify significant factors and
regression models are developed to validate the assumptions. Solutions that can mitigate the depreciation of the
Rupee are presented
Business Analysis and Research Lab SICSR
Showing posts with label trade deficit. Show all posts
Showing posts with label trade deficit. Show all posts
Monday, March 21, 2016
Rupee Exchange Rate Dynamics from 1993 to 2011: A Study of Factors Driving the Exchange Rate
Wednesday, October 21, 2015
Impact Of Rupee Exchange Rate On Business Opportunities In India
We published a research paper titled "Impact Of Rupee Exchange Rate On Business Opportunities In India" in the IOSR Journal of Economics and Finance and the paper can be accessed here: Link to the journal
In this paper, we have presented the impact of Rupee exchange rate on business opportunities in India from a macro economic perspective considering the indicators such as Consumer Price Inflation, Gross Domestic Product and Index Of Industrial Production.
Abstract: In this paper, we present an analysis of the macro economy in India with respect to the exchange rate
of the Rupee and de regulation of oil prices. These 2 factors have been critical in deciding the business
competitiveness of the economy and their individual effects are studied. Various business competencies arising
from strong and weak Rupee as well as de-regulated prices of oil are discussed.
In continuation with the analysis expressed in this paper, we would like to share the following analysis:
The Rupee exchange rate in India is linked to the trade deficit (imports - exports). Higher trade deficits lead to a weaker Rupee. Considering an economy which has certain total imports x and certain total exports y, if the exports start dropping and imports (of consumer goods) start increasing, it might be a cause of concern (on the competitiveness of the economy). A currency depreciation might boost the exports in the short run, by making them cheaper.
But consider the case of India. Here the primary imports are all in energy: oil, natural gas and coal. When the imports increase, we are importing more energy, and that is because the economy is doing well and we are producing and selling more (domestically and internationally). In this case, should the Rupee depreciate with increased imports? Think about it.
(Petroleum accounts for 34% of India's imports. Data source at tradingeconomics.com)
(Petroleum accounts for 34% of India's imports. Data source at tradingeconomics.com)
On another note, Japan manages to import energy (oil) to meet 42% of its energy needs, but does not see any inflation even if the Yen depreciates from 75 to a US Dollar to 100 to a US Dollar. This is not the case with India. As is evident from the above research paper, a depreciation of the Rupee vs US Dollar will lead to higher inflation in the country (data from 2010 to 2014).
The below graph shows the energy imports in India as a percent of total (Data from: tradingeconomics.com)
Saturday, August 8, 2015
Is further depreciation of the Rupee exchange rate going to be sustainable?
This blog post is a repeat from a blog I made around one year ago, on an older blog which can be found here: http://niravdesai1209.wordpress.com/ The blog was titled "Can the Rupee drop below 60 to a US Dollar in a sustainable manner?"
Firstly, the Rupee is slipping due to the widening Current Account Deficit (CAD). Foreign fund inflows into financial markets and goods and services exports are the 2 main factors contributing to a stronger Rupee and import of oil, gas and coal is the main factor contributing to the weakening of Rupee.
As the Rupee weakens, the imports of oil, gas and coal become more expensive and alternative energy sources such as wind, solar and nuclear power become more economically attractively. Moreover, wind and solar power have 0 operating costs and are not affected by inflation at all.
Back in 2013, TATA Power was able to sell coal power from its Mundra Plant at 2.5 rupees per unit. Solar power was priced at 7 Rupees per unit, subsidies brought it down to 5.5 Rupees per unit. Wind power was priced at 4 Rupees per unit or less on average.
Rapidly increasing solar cell efficiencies and system design improvements have brought the price of solar power to Rs. 5 per unit in March 2014.
Now if we factor in a 5% inflation and a rising price of imported coal (which is about 60% of total coal consumed in India), in another 1 year with the Rupee at 61-62 to a US Dollar, solar and wind power will be cheaper than coal and natural gas in India. This will reduce the demand for imported coal and the Rupee may stabilize at around 61-62 to a US Dollar.
In a free market economy, where the most cost effective power source is used, it is hard to drive the Rupee below 61-62 to a US Dollar in a sustainable manner. I don't see that happening.
What are your thoughts?
Here is the chart from the IEEFA document corroborating my claims:
Presentation prepared on SAP LUMIRA with data from Government report on the Energy Industry in India which can be found here: Energy Statistics 2013
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