Vinod Anand | 24 Aug 2013

HOW TO STABILIZE THE DECLING VALUE OF INDIAN CURRENCY (Vinod Anand) In recent times the value of Indian currency has been declining. In the year 2008 One Dollar was about Rs.39, but now it has reached the peak of Rs.64.It is highly fatal for the economy in all respects. Let us briefly look at the causes and remedies of this problem: The past two weeks have been disastrous for the  HYPERLINK "http://www.flipkart.com/books/1591843707?affid=suthukrish" \t "_blank" rupee value against dollar currency. The same time last month (22-Aug-2011), rupee value against dollar was 44.5 – 45.0 range, at this time of writing this article it is hovered to the range of 49.0 – 50.0. It is expected to rise further which would result in weakening the rupee value against the dollar currency. This kind of increase would have the drastic impact on the macro economy of the country like heavy raise in the import cost where countries like India heavily depends on the importing on Oil and other crucial raw materials needs for the industries. This article explores the reason behind the rupee value depreciation, how RBI trying to defend the rupee value and how it is going to affect the industries. I am not going deep dive into economic terms to understand the currency value fluctuation. There are many factors to decide the currencies values but that could be very difficult for the common man to understand the theory. Here I will put it in the simple words why the currency value is often fluctuated. A currency will tend to become more valuable when its demand is higher than supply. A currency will tend to become less valuable when its demand is less than supply. It is the basic theory. We need to understand in the global economy terms, when the currency will have more demand and when it will have less demand. Remember that exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries. Interest rates, Inflation and exchange rates are highly related. Reserve bank changes the interest rates to control the Inflation and exchange rates. In the last week we have seen RBI has acted to stop the erosion of rupee value against the dollar currency. What it did was sold the dollar currency in the market to increase the value of rupee. But, it is very difficult for the Reserve Bank of a country to adjust the value of the currency, the long term solution would be fix the problem in economy and bring the inflation into control. You would wonder why RBI has to intervene on currency value decrease or increase. Note that, RBI would not allow currency to be higher after certain level because of the exports would get affected like IT companies would suffer if the Rupee gets appreciated against the dollar. India is heavily dependent on the import of raw materials and Oil for its industrial development. In the decreasing rupee scenario, the outgo of money will be much higher. This would affect the expenses for the companies who imports raw materials for their factory and all the Oil Marketing Companies (OMC) will incur heavy payment to import the Oil. Now you would have understood why the Petrol prices have been increase in the last fortnight. If you look into the news papers, the reason said by our finance minister was the depreciation of rupee value against dollar. The more money in circulation, the less value it has. Compare money to antiques and collectibles. Say Company X makes popular toys. Say a dozen of these toys are made with a different colour than the rest, and four are destroyed, one is kept at the company and the other seven some how make it out to the public, to which people learn these items are a unique version of a popular toy - demand goes up, the supply is extremely limited, so the toys go to the highest bidder, who holds on to it and allows it to gain value. The other toys, manufactured as usual, are sold at a regular price and are not in such demand, and eventually everyone who is going to want one, has one, and then they lose value. If the government makes too much money, and everyone ends up having an appropriate amount, the market is flooded and the money loses its value, as do products, because there is too much money in the market for people to buy whatever, and then this causes the cost of everything to artificially inflate - regions of Africa are experiencing this, currently. We went off the gold standard a while ago, as there was not enough gold in the reserve to back the money in print. If we print enough money to support our current market, the market is controlled by external factors - cost of equipment, fuel, etc. The Value of nation's currency depends upon volume of its imports over exports. The more you import more you need to buy foreign currency & our currency falls with increase in demand of foreign currency. India is dependent heavily on imports for fuel; metals etc. & generally consume most of its domestic production. Gold is not the most reliable source to trust upon. Gold is a metal got space in hearts of institutions due to consumers sentiments attached to it but recent data shows it has become highly volatile & its value is varying vary sharply comparing to past. Gold is generally kept is hedge (secret) fund to fight against inflation. Government is doing its efforts to fight against inflation & devaluation if its currency but it takes time & one must understand pain it takes to tackle with the situation. In fact, Currency is never stable. It all depends on how the economy is doing relative to other economies and how well our money is backed up. The stronger economy, the higher value the USD will have verses other currencies (i.e. euro, peso). Gold is always gold. Therefore the value of gold is dependent on how good the economy is doing. Gold is the most stable way to keep money because it cannot be lost. Gold's value fluctuates with the economy. Let us hope for the best.     PAGE  PAGE 2