Vol.

1 Issue-2

July December 2013

DEPRECIATION OF INDIAN CURRENCY

AND ITS IMPACT ON INDIAN ECONOMY
Dr.P.Chellasamy
*Faculty, School of Commerce, Bharathiar
University, Coimbatore- 641046, Tamil Nadu,
India.

Abstract: The present study has to analyze the

effects on Indian currency depreciation against
the dollar. The study covers the area of currency
growth, foreign investment and macro economic
factors these are all the components to effect of
currency depreciation in India during the study
period from 1989-1970 to 2012-2013. The study
highlighted in 2009 2010 the Indian currency
exchange rate was hovering around the 43 45
rupees per US Dollar. Over the past one year,
the rupee has consistently depreciated against
the dollar with the last quarter of 2011 being one
of the worst in terms of rupee value depreciation.
On November 21 alone, overseas funds sold
more than US$500 million worth of Indian-listed
shares over the five trading sessions, reducing
net inflows for 2011 to under US$300 million.
The current scenario flow of foreign capital
(Investment) to reduce when compare with last
two decades. Lacking of inefficient market
condition, highly dominating budget against the
small traders, Balance of Payment (BOP) face
the decreasing trend, high investment in gold and
decreasing the revenue collection of existing
foreign investors. These are all the factors to
support decreasing rupee value against the
dollar.
Key words: Impact of EXIM in Dollar
fluctuations, Currency growth between pre and
post period of Liberalization, Foreign investment

in Indian capital market, Factors influencing the

currency depreciation.

Introduction: Devaluation means decreasing the

value of nation's currency relative to gold or the
currencies compare to other nations. Devaluation
is usually undertaken as a means of correcting a
deficit in the balance of payments, Inflation and
GDP Growth for the nations. Some analyst view
in a Country weakening the value of currency
could actually foreigners stop the investing in the
country, High inflation rate of domestic product,
New Export and Import policy, External debt,
Tariffs and quantitative restriction which would
make it current account (trade) deficit on trade
practices. (Sumeet Agrawa, 2012).
The Indian rupee is under great stress as overseas
investors are paring their exposure to Asias
third-largest economy amid international
uncertainty and mounting worries over the
domestic economy. The exchange rate between
the Indian Rupee and the US Dollar has gone
over the roof. In 2009 2010 the exchange rate
was hovering around the 43 45 rupees per US
Dollar level. Over the past one year, the rupee
has consistently depreciated against the dollar
with the last quarter of 2011 being one of the
worst in terms of Rupee Value Depreciation. On
November 21, 2013. alone, overseas funds sold
more than US$500 million worth of Indian-listed
shares over the five trading sessions, reducing
net inflows for 2011 to under US$300. (Shelly
Singhal, 2012).
Impact of Exim In Indian Currency
The impacts of devaluation on the economy
could be the stimulation of discouraging exports

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and imports its reflecting the terms of trade,

decreasing revenue collection by existing foreign
investors these are all the affect the rupee value.
In the current scenario Inflow of foreign capital
can be improved by devaluation. In past decades
Foreign Direct Investment (FDI) into the Indian
economy and reduced the Balance of Payment
(BOP) gap, Indian rupee appreciation against
dollar impacted heavily to the following:
Exporters
Importers
In India Exports Handicrafts, Gems, Jewellery,
Textiles, Ready-made garments, Industrial
machinery, Leather products, Chemicals and
related products. Since the 1990s, India is the
world's largest processor of diamonds. The
mentioned export items contribute substantially
to foreign receipts. During the periods when the
dollar was moving high against the rupee,
exporters stood to gain, when $1 = Rs. 48, was
getting them Rs. 4800 for every $100. Since the
beginning of the year 2007, rupee appreciated by
about 10%. With its value of rupee Rs. 39.35 =
$1 as on 16 Nov 2007, for every $100, exporters
would get only Rs. 3935. This difference is
towing away the profit margins of exporters
providers alike.
Imports to India are of Petroleum products,
Capital goods, Chemicals, Dyes, Plastics,
Pharmaceuticals, Iron and Steel, Uncut precious
stones, Fertilizers, Pulp paper etc. With the same
scenario as given for export, if we analyze - an
importer is paying Rs. 3935 now instead of Rs.
4800 paid during the 2007 for every $100. This
gain on FX (Foreign Exchange Market) is likely
to create savings in cost, which could be passed
on to consumers, thereby contributing to control
inflation.

Sample of Earlier Studies

Edwards (2000) investigated the dynamic
association between exchange rate regimes,
capital flows and currency crises in emerging
economies. The study draws on lessons learned
during the1990s, and deals with some of the most
important policy controversies that emerged after
the Mexican, East Asian, Russian and Brazilian
crises. He concludes that under the appropriate
conditions and policies, floating exchange rates
can be effective and efficient.
Taylor (2001) discusses the failure of liberalized
policies in Argentina. He says that Argentina has
failed in maintaining the liberalized policies
about capital flows and a firm currency.
Argentina had anti-inflation program based on
freezing the exchange rate in the early 1990s.
This means that the money supply within the
country and the supply of credit to firms are tied
directly to international reserves. So if the
country gets capital inflows, the supply of money
and credit increases, leading to a substantial
increase in domestic prices.
Harberger (2003) studied the impact of
economic growth on real exchange rate. He
found that there is no systematic connection
between economic growth and real exchange
rate. Husain et al. (2004) found in their study that
little access to international capital is available
for the weaker and less developed countries, so
low rate of inflation and higher level of
durability is associated with fixed exchange rate
regime in those countries. However, they found
no robust relationship between economic
performance and exchange rate regime in the
developing economies. They also found that
advanced economies may experience durable and
slightly higher level of growth rate without higher
level of inflation in flexible exchange rate regime.

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Statement of the Problem: If we look at Indias

Balance of Payments since 1970-71, we see that
external account mostly balances in 1970s. Infect in
second half of 1970s there is a current account
surplus. This was a period of import substitution
strategy and India followed a growing economy
model. In 1980s, current account deficits start into a
BOP crisis in 1991. It was in the 1991 Union Budget
where Indian Rupee was devalued and the
government also opened up the FDI. India FX rate
system was on the fixed rate model till the 90s, when
it was switched to floating rate model. Fixed FX rate
is the rate fixed by the central bank against major
world currencies like US dollar, Euro etc. Floating
FX rate is the rate determined by market forces based
on demand and supply of a currency. If supply
exceeds demand of a currency its value decreases, as
is happening in the case of the US dollar against the
rupee, since there is huge inflow of foreign capital
into India in US dollar (Sumeet Agrawa, 2012).
The current scenario flow of foreign capital
(Investment) to reduce when compare with last two
decades. Lacking of inefficient market condition,
highly dominating budget against the small traders,
Balance of Payment (BOP) face the decreasing trend,
high investment in gold and decreasing the revenue
collection of existing foreign investors. These are all
the factors to support decreasing rupee value against
the dollar. With this backdrop, in the present study,
the researcher has made an attempt to analyze the
Indian currency growth when compare with other
country currency and which factors highly
influencing the currency fluctuation in India. Hence,
the researcher wants to know the answers for the
following research questions:
Whether the exchange rate of Indian rupee
compare
between
Pre
and
PostLiberalization grow or not?
What is the growth of foreign investments
flow in Indian capital market?

The following are the objectives of the study:

To analyze the growth of exchange rate in
Indian rupee compare between Pre and PostLiberalization.
To examine the growth of foreign
investments flow in the Indian capital market.
Scope of the Study This study aims to know the
effects of Indian currency depreciation against the
dollar, what are all the factors to influencing the
currency devaluation against the dollar with the help
of select tools.
RESEARCH DESIGN
Sources of Data: The data collected for the study is
secondary one. The required data for the study were
collected and compiled from the RBI Website and
Bulletin and the study covers a period of ten years
from 1969-1970 to 2012-2013. In addition, the other
required data were collected from various journals and
magazines.
Framework of Analysis: The collected data have
been used for analysis with the help of statistical
tools. Namely Mean, Standard Deviation (SD), Coefficient of Variance (CV), Compound Annual
Growth Rate (CAGR), Correlation and Paired t
statistics analysis.
Hypotheses:The following hypotheses have been
framed in the present study:
H01: There is no significant relationship
between the Indian currency growth Pre and
Post period of Liberalization.
H02: There is no significant relationship
between the exchange rate and macro
economic variables.

Objectives of the Study

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ANALYSIS AND INTERPRETATION

Table 1 Growth of Exchange Rate in Indian Rupee Vis-A-Vis the Us Dollar, Pound Sterling, D. M. /
Euro and Japanese Yen Pre-Liberalization from 1989-1999 to 1990-1991.
Table 1
Growth of Exchange Rate in Indian Rupee Vis-A-Vis the Us Dollar, Pound Sterling, D. M. /
Euro and Japanese Yen
Pre-Liberalization from 1989-1999 to 1990-1991
(Per Rupee value for each Country)

Source: Compiled and Calculated From RBI Report.

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Table-1 reveals that the growth of exchange

rate in Indian rupee vis-a-vis the Us Dollar,
Pound Sterling, Euro and Japanese Yen 19891999 to 1990-1991. In Indian rupee growth
compare with other countries growth shows the
fluctuating trend during the study period. The
tables shows that the positive growth on Indian
rupee and Japanese Yen when compare with
other country currency during the study period

from1989-1990 to 1990-1991 of the before

liberalization. In 1979- 1980 to 1990-1991was
continues growth on US Dollar, 1982-1983 to
1990-1991 has been positive growth on Pound
Sterling and Euro. It was due to the efficient
market power, no competition of large traders,
Balance of Payment (BOP) to face the
increasing trend these are all the reason the
currency to grow equally in dollar value.

Table 2
Growth of Exchange Rate in Indian Rupee Vis-A-Vis the Us Dollar, Pound Sterling, D. M. / Euro and
Japanese Yen
Post-Liberalization from 1991-1992 to 1912-1913
(Per Rupee value for each Country)

Source: Compiled and Calculated From RBI Report.

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Table-2 shows that the growth of exchange rate

in Indian rupee vis-a-vis the Us Dollar, Pound
Sterling, Euro and Japanese Yen 1990-1991 to
2012-2013. In Indian rupee growth compare
with other countries growth shows the
fluctuating trend during the study period. The
highest rupee value but lowest growth indicates
that the 1997-1998 to 2003-2004 in Indian
currency, 1991-1992 to 2001-2002 in US
Dollar, 1991-1992 to 1999-2000 in Pound

Sterling, 1991-1992 to 1996-1997 is a Euro and

2006-2007 to 2012-2013. It was due to proper
irregular activities of Balance of Payment,
Multinational Companies dominations, could
not predict and uncontrollable factors of
inflation in domestic product and slowly growth
of GDP growth in India. These are all the cases
the Indian rupee value depreciation against the
other Country currency for Post-Liberalization.

Table 3
Paired t Test for Pre and Post Liberalization of Exchange Rate of the Indian Rupee Vis--vis the Us
Dollar, Pound Sterling, D. M. / Euro and Japanese Yen from 1989-1999 to 1990-1991 and 1991-1992 to
1912-1913

H01: There is no significant relationship between the Indian currency growth Pre and Post
period of Liberalization.
Paired Differences
Mean
-40.40834

Std. Deviation Std. Error Mean

7.95889

3.55932

95% Confidence Interval of the Difference

Lower

Upper

-50.29060

-30.52607

df

-11.353 4

Sig.
S/NS
(2-tailed)
.001

Note: S= Significant, NS= Not Significant, Significant at 5 Per cent Level.

It is observed from the table 3 that the pre and post liberalization of exchange rate of the Indian rupee
Vis-a-Vis the Us Dollar, Pound Sterling, Euro and Japanese Yen from 1989-1999 to 1990-1991 and
1991-1992 to 1912-1913. The calculated value is less than 0.05 at 5 per cent level of significance.
Hence, the hypothesis is rejected. So, there is a significant relationship the Indian currency growth
Pre and Post period of Liberalization.

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Exhibit 1
Net Investments by Foreign Investments in the Indian Capital Market during from 1990-1991
1990
to
2012-2013
(Rs. In Millions)

Source: Compiled and Calculated From RBI Report.

The above Exhibit-11 shows the Foreign Investment in Indian capital market during the study
period from 1990-1991 to 2012-2013.
2013. The highest foreign investment in India has to the $1,406.24
million in 2012-2013,
2013, followed by $ 1,149.01 million in 2009
2009-2010 and
d $ 1,107.59 million in 20102010
2011. It was due to the Indian currency and GDP increase positive growth against the US dollar. The
negative foreign investment in India has to the $ 433.37 million in 2008
2008-200
200 and $ 7.29 million in
1999-2000. It was due to uncontrollable
ontrollable inflation rate in domestic products and deficit of trade
practices in India.
Table 4
Various Macro-Economic
Economic Factors Compare with the Exchange Rate from 1990
1990-1991
1991 to 2012-2013
2012
Year

Exchange Rate

Inflation

Interest Rate

External Debt

(Lending Rate)

(Current US Dollar)

(Rs. In Millions)
GDP
FDI

1990-1991

22.30

13.90

17.90

86.86

3.10

74.00

1991-1992

25.90

11.80

18.90

89.66

3.90

277.00

1992-1993

30.35

6.40

16.30

93.06

4.10

550.00

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1994-1994

31.37

10.20

14.80

99.61

4.60

973.00

1994-1995

32.36

10.20

15.50

95.17

4.70

2144.00

1995-1996

35.42

9.00

16.00

94.91

5.30

2426.00

1996-1997

36.29

7.20

13.80

94.70

6.40

3577.00

1997-1998

41.20

13.20

13.50

98.77

7.70

2635.00

1998-1999

43.05

4.70

12.50

99.13

7.50

2169.00

1999-2000

44.91

4.00

12.30

100.24

7.59

3584.00

2000-2001

47.18

3.70

12.11

98.64

4.30

5472.00

2001-2002

48.63

4.40

11.90

104.82

5.52

5626.00

2002-2003

46.56

3.80

11.15

117.87

3.99

4323.00

2003-2004

45.30

3.80

10.90

122.59

8.06

5771.00

2004-2005

44.09

4.20

10.80

120.22

6.97

7606.00

2005-2006

45.29

6.10

11.12

158.50

9.48

20336.00

2006-2007

41.27

6.40

13.00

202.93

9.57

25483.00

2007-2008

43.24

8.40

13.30

225.99

9.32

43406.00

2008-2009

48.36

10.90

12.20

249.99

6.72

35596.00

2009-2010

42.60

12.00

10.20

290.28

8.59

24159.00

2010-2011

73.64

8.87

10.17

260935.00

9.32

1107.60

2011-2012

81.79

9.30

10.06

305861.00

6.21

499.18

2012-2013

81.48

11.14

11.00

345498.00

4.96

1406.25

Mean

44.89

7.98

13.02

39779.91

6.43

8660.87

SD

15.02

3.24

2.44

103127.44

2.00

11971.88

2.59

0.31

1.38

CV
0.33
0.41
0.19
Source: Compiled and Calculated From RBI Report.

Table-3 ravels that the various MacroEconomic factors compare with the exchange
rate from 1990-1991 to 2012-2013. The
average exchange rate shows the positive
growth during the study period. This has been
due to the surplus Balance of Payment in India.
In 1990-1991 has the lowest rate of exchange
Rs. 22.30, when compare with 2012-2013 is Rs.
81.48. The average inflation rate shows the
fluctuating trend during the study period. The
rate of inflation 13.90 per cent in 1997-1998,
when compare with 3.80 percent 2000-2001. It
was due to the decreasing trend of GDP growth
in India. The average interest rate shows the
fluctuating trend during the study period.

Interest rate from 1991-1992 has the highest

rate of 18.90 per cent, when compare with
10.06 per cent in 2011-2012. It was due to
maintain unfavorable lending high loan to the
industry and individual and less maintenance of
cash reserve ratio (CRR).
The average external debt shows the increasing
trend during the study period. The lowest
external debt was $ 86.86 million in 1990-1991.
The highest external debt was increased $
345498 million in 2012-2013. It was due to
reduce the foreign investment return and excess
of export over the import. The average GDP
growth rate shows the fluctuating trend during
the study period. The highest GDP growth

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stands for 9.57 per cent in 2006-2007. The

lowest GDP growth stands for 3.10 per cent in
1990-1991. The average rate of FDI is
fluctuating trend during the study period. In
India the highest investment of $43,406 million
in 2007-2008, when compare the lowest

investment of $ 74 million in beginning period.

Its found that the India has been adopting
traditional market system and un modernization
infrastructure facilities compare with other
developing countries.

Table 5
Correlation Analysis of Various Macro-Economic Factors Compare with the Exchange Rate
from 1990-1991 to 2012-2013
H02: There is no significant relationship between the exchange rate and macro economic variables.
Exchange Rate Inflation Interest Rate External Debt GDP
Exchange Rate Pearson Correlation
Inflation
Interest Rate
External Debt

Pearson Correlation
Pearson Correlation
Pearson Correlation

FDI

1
-.227

.468*

**

.123

-.385

-.781
.836

**

-.139
.064

GDP

Pearson Correlation

.437

FDI

Pearson Correlation

.059

-.612

**

-.269

1
.179

-.213

.567**

** Correlation is significant at the 0.01 level (2-tailed).

* Correlation is significant at the 0.05 level (2-tailed).

Table -5 reveals the correlation analysis of various macro-economic factors compare with the
exchange rate from 1990-1991 to 2012-2013. The positive correlation was observed between
External debt and Exchange rate (.836), FDI and GDP (.567). The negative correlation was observed
between Interest rate and Exchange rate (.781), GDP and Interest rate (.612) which are significant at
1 percent level. The positive correlation was observed between GDP and Exchange rate (.437),
Interest rate and Inflation (.468) which are significant at 5 percent level.

Policy for Implications:

In post-liberalization period of Indian
currency exchange value growth is very
low when comparing with dollar, pound,
sterling, euro and yen values. It indicates
that the export over the import, highly
inflation and multinational companies
dominations. So, in order to increase the

appreciation of Indian currency value

Central Government must control deficit
in order to raising import taxes, restrict
and regulate exports and imports.
Foreign investment in Indian capital
market shows the decreasing trend
during from 2008-2009 to 2012-2013.

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So, in order to increase the foreign

investment the government needs to
control external foreign debt, GDP
growth and raising the cap on foreign
investment, remove traditional market
conditions.
Macro- Economic factors like interest
rate is highly related with depreciation or
appreciation of Indian currency against
the dollar value. So, the Central

Government must increase cash reserve

ratio (CRR) along with interest rate.

CONCLUSION
This research articles helps to find out the empirical relationship among the various macroeconomic variables and foreign investment analysis to know the current scenario and currency
depreciation against the dollar value in India. Post-liberalization period of Indian currency exchange
rate is not satisfactory. However, foreign investment in Indian capital market shows the decreasing
trend during the study period. Similarly, the analysis reveals that the exchange rate in Indian currency
was highly depreciation of Post-liberalization period and also its impact on the Indian economy. So,
in order to Indian government take necessary step in to introduce new economic policy to switch over
thisscenario
.
Reference:
1. Sumeet., A, (2012). Effect of Devaluation on Indian Currency in Indian Economy,
International Referred Research Journal, Vol.3, Issue-28, pp.58-59.
2. Shelly., S, (2012). An Analytical study on Indian Currency Rupee Depreciation against
the US Dollar and Its Economic Impact, Journal of Economic and Management, Vol.1,
Issue-1, pp.74.83.
3. Edwards, S. (2001) Exchange Rate Regimes, Capital Inflows and Crisis Prevention,
NBER and
4. University of California (Working Paper), pp.42.57.
5. Taylor, L. (2001) Argentina: A Poster Child for Failure of Liberalized Policies?
Challenge, NovemberDecember. 44, 6, 2844.
6. Harberger, A. (2004), Economic Adjustment and the Real Exchange Rate, University of
Chicago Press, 10, 308-321.
7. Secondary Data retrieve from http:www.rbi.org.in/.

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