Movement of Rupee since 1991
During the latter half of 1970 there was a current account surplus. That was a period of import exchange strategy and India was following a model of closed economy. During the 1980 the current account deficit began to increase resulting into a Balance Of Payment (BOP) crisis in 1991. During the 1991 Union Budget the Indian Rupee was devalued and the Indian government opened up its economy. Due to this several reform were liberalized and the economy’s exchange rate shifted from a fixed to a floating one. Hence, there was a need to analyze the current account and also the rupee movement from 1991 onwards. India always faced a current account deficit except the initial years in 2000. The deficit had been funded through capital flows and mostly capital flows were higher than the current account deficit resulting in balance of payment surplus. The surplus led to a rise in the forex reserves from 5.8 billion Dollars in 90-91 to 304.8 billion Dollars by 2010-11 (Exhibit 2). In 90-91, gold contributed to around 60% of forex reserves and forex assets were around 38%. This percentage has transformed to 1.5% and 90% respectively by 2011-12.
Figure 1: Balance Of Payments
Figure 2: Forex Reserve
In the table below we can see that during 1990 - 2000 there was a surplus in the Balance of Payment by about 4.1 billion dollars and it increased to around 20 billion dollars in the year 2000. During the period in 2000-05 and 2005-11 we can see a steep decline and a sudden rise respectively in both the capital account surplus and current account deficit. Post 2004 the Balance of Payment had been declining and became a matter of concern. There has been a rise in the Forex Reserves mainly during 2005 - 11.
Table 1: Balance of Payment
While looking at the Rupee movement in the figure below one can clearly interpret and see that the rupee has been depreciating since 1991. Figure 3 is depicting the Rupee movement against the other major currencies. The best way to understand the movement of Rupee is to track the real effective exchange rate. Real effective exchange rate (REER) is formed on basket of currencies against which a country trades and is adjusted for inflation. A rise in index signifies appreciation of the currency against the basket and a decline signifies depreciation.
Meade (1988) stated that, because of the exchange rate rapid decline so much since early 1985 in the US and because the monthly trade statistics has been examined so thoroughly for any sign of a turnaround in the nominal trade balance, the J-curve phenomenon has received much attention. The statistics often implies that the negative effect of depreciation is reflected in the J-curve as the continuation of nominal trade deficit. Between early 1985 and 1988, the exchange value of US dollar in terms of currencies of other countries, registered a sizeable depreciation. The deficits recorded in the trade account were mirrored in the current account deficit. Meade depicted the significance of the exchange rate to the trade account as well as current account through the use of the J-curve highlighting that the phenomenon is used as a long-term goal to curb the deficits, however in the short-run, depreciation will increase the nominal deficits accumulated by a country.
1) Japan still has the largest foreign currency reserves in the world even after years
Mexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investing over private savings. However, the country was able to maintain an improving fiscal account from US$3.6 billion deficit in 1990 to US$0.7 billion surplus in 1993. The deficit in current account was financed through capital funds from abroad resulting the capital account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993.
Rupee's journey since indendence: Down by 65 times against dollar. (2013). The Economic Times. Retrieved from http://articles.economictimes.indiatimes.com/2013-08-24/news/41444029_1_indian-rupee-american-currency-continued-dollar-demand
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
b) Assume that the foreign central banks neither buy nor sell Pecunian assets. How did the Pecunian central bank’s foreign reserves change in 1998? How would this official intervention show up in the balance of payments accounts of Pecunia?
The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. It determines the relative values of different currencies. A local currency is a currency not backed by a national government, and intended to trade only in a small area. Currency is used as a medium of exchange in goods and services. It has vital role in the economy. Because devaluation of a local currency makes its goods relatively cheaper; it increases the capacity of exports. With the decrease in demand for local country’s goods and services, its local currency devaluates and reverse is the case if its volume of exports increases.
Back in 1997, there was the financial crisis occurred in Asia. Thailand was one of the countries that also got the effect from that incident (This financial crisis was spread around Asia especially Taiwan Indonesia and Malaysia). Thai Baht was astoundingly depreciated from 25 baht per US dollar to 43-48 baht per US dollar. Depreciating of Thai currency also had impact on the external debt of Thailand. External debt of Thailand was increased from 29,300 million US dollar to 82,600 US dollar in 1996 and became 109,300 million US dollar in 1997. 22.5 percent of the External debt was from government and 77.5 percent from private sectors.
When Richard Nixon suspended the convertibility of US dollars to gold in 1972, the fixed rate between the dollar and the yen was exchanged for a floating rate. The international value of the yen rose sharply and is today one of the most attractive currencies on the market as it directs the world's second largest economy. The yen is controlled by a central bank known as the Bank of Japan or BOJ. This central bank is under the supervision of the Minister of Finance. Over the past decade, the yen has fluctuated greatly. From early 1990 through mid 1995, the yen doubled in value from 160/$ down to 80/$. From 1995-1998, the yen lost value and was back up in the 140's/$. The trend in the past year has been a steady increase in value for the yen. Over the past six months, the yen has fluctuated. From April through mid-July, the yen floated between 124/$ and 118/$. Since then it has increased in value falling to the area of 105/$.
5. Presence of central bank: The Reserve Bank of India has been vested with wide powers of control over different institutions in the money market. The indigenous banking has, however, remained outside the sphere of RBI’s direct control. The rates of interest in the unorganized sector are, therefore, substantially higher than those in the organized sector. The Central Bank controls money supply of the country as per needs of the economy. The other member banks can borrow from The Central Bank during emergency. Thus, a powerful Central Bank controls, regulates and guides the money
The currencies floated the ringgit was determined by the interaction of supply and demand in the international financial markets and it should be noted that the currency has a price or depreciation does not necessarily have a fixed meaning. Then, there is a real effective exchange rate. The weights are determining by comparing the relative trade balance, in terms of the national currency with every other country in the index. For example, a barrel of Brent crude oil prices began to fall sharply in June 2014 following
an increase of 84% in cash and cash equivalents, including placements, mainly through balances with banks abroad
With a GDP of $1.842 trillion in 2012, India is one of the fastest growing economies (The World Bank Group). Another determinant of a country’s competiveness level is its exchange rate; the Indian Rupee decreased to 60.92 this March from 62.10 in February 2014 per USD. The Indian Rupee averaged 32.51 since 1973, with a maximum rea...
Moreover, the global imbalances also make capital flowing incorrectly, from developing countries to advanced countries, from advanced countries to other advanced countries. This makes developing countries with fast productivity growth show capital outflows and vice versa, leads to the surplus of developing...
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...