Economics · Management · Strategy

Fall Of Rupee and Fiscal Strategy – A Study of Causes, Effects and Solutions Related To Rupee Free Fall


This study examines the depreciation of the exchange rate of dollar to rupees. In this paper, we analyze the factors that are responsible for the fall of rupee, its impact on business, education, employment and inflation and the measures taken to curb the rupee free fall with special focus given to strategies adopted by other countries. Ever increasing demand of dollars, critical CAD, volatile nature of equity markets, surge in the import bill and speculative trading set the roller coaster fall in rupee value .Study of the 2008 financial crisis and its consequences has also been highlighted in an analytical fashion supported by statistics. Effects ranging from hike in travel expenses to increasing education loans have also been pondered upon in the study. Furthermore, steps taken by the Indian Government such as increased loan rates, increase of credit to infrastructure projects to stem the rupee slide, has also been reviewed with special emphasis on economic strategies adopted by developed countries in restoring the economy.


The Indian currency has witnessed many ups and downs since independence. Following is a chronological look at the Indian rupee’s journey since 1947.On Aug 15, 1947India got freedom from British rule. At that time the value of Indian rupee was at par with the American dollar. With the introduction of the Five-Year Plan in 1951, development and welfare activities were initiated for which the government started external borrowings. This craved the devaluation of the rupee. After the adoption of a fixed rate currency regime the rupee clinched at 4.79 against a dollar between 1948 and 1966. Huge development expenditure owing to which there were large scale imports hit India a serious balance of payment crisis in 1991 and was forced to sharply devalue its currency. Political instability resulted to the decline in FDI and FII. Credibility of India was reduced due to assassination of Rajiv Gandhi and the investors lost their interest and trust in the government. Between March 1991 and June 1991, there was acute withdrawal of non-resident deposits inducing to further drop in foreign exchange reserves. This concluded to credit unavailability, trade disruption, shortages, industry dislocation, unemployment, high inflation and instability. Indian economy began to slow down in 2007-08 after reaching a GDP growth of 9.8 per cent in the last quarter of 2006-07. The Indian economy too felt the impact of the 2008 financial crisis though not to the same extent as to America, European Union and UK. The consequences in India were drastic.

• Estimates suggested that at least a minimum of 30,000 jobs were impacted immediately across the Indian Software industry. The IT industries faced hard days.
• The realty sector witnessed a sudden slump in demand because of the global economic slowdown. Expansion plans were curtailed due to non availability of capital from bankers as well as buyers.
• The confrontation resulted in net outflow of $ 10.1billion from the equity and debt markets in India. Deficit in Balance of payments also emerged.
• Capital inflows in the country dried up. Investment in healthcare, hospitality and tourism slowed down. Mega projects, which were under implementation, were bound to buy more time before injecting funds into infrastructure and other ventures.
• The confrontation resulted in net outflow of $ 10.1billion from the equity and debt markets in India. Deficit in Balance of payments also emerged.
• Capital inflows in the country dried up. Investment in healthcare, hospitality and tourism slowed down. Mega projects, which were under implementation, were bound to buy more time before injecting funds into infrastructure and other ventures.
• Stock prices fell by 60 percent. In January, 2008 Sensex touched the 21k mark but in October, 2008 it plunged below 10,000.
• In the past few months especially after January 2013 the rupee has fallen a staggering 19% against the American dollar. It reached a new low of 68.80 per dollar on 28th August 2013.


Exhibit 1 – Year wise comparison of INR and USD


• An ever increasing demand for dollars resulted in an appreciation in dollar value while rupee value dipped. Income levels influence currencies through consumer spending. When incomes increase, people spend more. Higher demand for imported goods increases demand for foreign currencies and, thus, weakens the local currency.
Importers formed the major chunk of the demand for clearing the payments.

• The worth of crude oil has put tremendous stress on the value of rupee since India fulfills majority of its requirement from overseas. Oil prices are quoted in dollars. So, an increase in oil demand or its value leads to increase in the demand for dollars to pay its suppliers. As a result value of rupee slides in comparison to dollar. India has been coal and exporting petroleum products for decades. However, the export does not compensate for India’s exposure to energy imports given the volumes. Crude prices always bear a strong relationship with global economic activity. When activity improves, crude prices rise. However, it can be disrupted by event risks or economic distortions such as quantitative easing. Crude prices tend to correct in expectation of reduced global economic activity. As observed during the recent downturn, a falling rupee prevents Indian consumers from benefiting from a reduction in global commodity prices, including crude oil. An inflexible domestic consumption further affects the fiscal condition.

• The central banks of Eurozone and Japan have been shedding a lot of money which has devalued their currency. Added to this, the decision of US Federal Reserve to end the fiscal stimulus increased the strength of dollar value in comparison to other currencies including Rupee. Till 2013, US Dollar index stands stronger by 1.91%.

• Inability of the govt to arrest rupee free fall lies in the critical Current Account Deficit which reached its record high of 4.8% in March 2013. Government’s failure to find new locations for export as well as absence of single window for clearance purpose and procedural delays has hampered growth in exports and affected rupee drastically.

2Exhibit 2 – Year wise Forex debt of India


Exhibit 3 – Trade deficit of India

Due to the recent surge in the import bill mainly due to gold imports, the fiscal deficit is on a high thereby leading to an increase in demand for dollar. As a result, rupee is witnessing a downslide in this front too.

4Exhibit 4 – Effect of weakening rupee on gold price

• The volatile nature of equity markets has raised doubts in the minds of investors who are rapidly looking for greener investments in other places leading to a decrease in inflows causing rupee depreciation. This weakened rupee further cuts out more investment and this cycle leads to a landslide in the worth of rupee.
Inordinate delays, land acquisition problems, government clearance delays, lack of promptness led to the withdrawal of investments by Foreign Institutional Investors (FII) thereby creating a shortfall in dollar supply.

• High interest rates attract Foreign investment. However decline in the growth of major Indian industries like agriculture, mining and manufacturing has prompted the RBI to slash the rates thereby withdrawal of investors leading to dearth in capital inflow.

• Prolonged inflation has lead to an increase in the domestic cost. This
has dampened economic prospects of the country leading to a decrease in capital outflows thereby depreciating the currency.
Every generation complains about price rise. Prices shoot up when goods and services are scarce or money is in excess supply. If prices increase, it means the value of the currency has eroded and its purchasing power has fallen.

A fall in purchasing power due to inflation reduces consumption, hurting industries. Imports also become costlier.


Exhibit 5 – Import and Exports of India

• Risk of speculative trading in currency markets has put further pressure in Indian currency.
Speculative trading is the trading of futures contracts, without the intention of actually obtaining the underlying commodity. These traders buy or sell futures contracts with the intention of re-selling these contracts before the maturity date. They expect the price of a futures contract to move in their favor, which will grant them a profit when selling these contracts. Speculative trading however can be risky, because there is no guarantee prices will move in their favor. During recent times, when the value of rupee moved against its position, it resulted in huge substantial losses.


Fall in value of rupee in the recent course is due to supply-demand lopsidedness in domestic foreign exchange market on account of exalted levels of current account deficit (CAD) and volatility in capital flows. Importers will strongly feel the pinch of falling rupee as they will be contrived to pay more rupees on importing stock.

  1. The crippling rupee has made India’s bulk imports such as crude oil, fertilizers, medicines and iron ore costlier. Rising prices of these objects will impact finances diffusely and will negatively brunt the savings.
  2. Despite of these gloomy effects, a weak rupee will make Indian produce more competitive in global markets. Export houses which earn in dollars are having a good time as goods exported abroad will fetch dollars which in return will translate into more rupees.
  3. Fast Moving Consumer Goods (FMCG) sector will also be affected due to the higher cost of imported raw materials.
  4. Overseas education will become costlier. Students who wish to acquire international qualification will have to pay more. Students who have taken loans to fund their foreign degree are also bearing the impact. Education loans are generally in rupees, but as students pay their expenses in a foreign currency, the cost of education and sojourn has increased.
  5. Higher exchange rates will likewise impact travel and hotel charges. Travel expenses as well as hotel expenses will escalate drastically. Instead Indian Tourism might see an incline due to increased dollar to rupee exchange rate.
  6. The feeble rupee has impacted the automobile precinct in three ways. First, input costs have surged as these companies use imported components. Furthermore some companies will have to pay higher royalty to foreign parent firms. Also, many companies have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds.
  7. A pressure on surplus could also mean firms being forced to cut down production, implying salary cuts and possible downturn.
  8. The steep fall in the value of the currency will adversely impact the development plans and new projects of the companies, thus having a cascading repercussion on the job market. Everything banks on consumer confidence in spending. If the rupee remains morose for long, the demand for goods and services will decline, that in turn will affect companies’ plans to hire. Thus, new or replacement appointments will be badly put on hold.


Exhibit 6 – Credit growth curve


Exhibit 7 – Depreciation of rupee as compared to other currency


Some short term measures that can be taken to overcome the problem and strengthen the value of rupee quickly, can be:

  1. Creating a dollar window for Oil companies by paying them directly in dollar from the central bank instead from the market.
  2. Banks and financial institution can be persuaded to raise funds in dollar abroad and lend them in local market, a practice that has been tried and tested by many countries in the past specially the euro zone.
  3. Ask importers to delay dollar payments and exporters to convert their forex dollar holdings.
  4. Issue attractive NRI bonds to attract money from Indians living abroad.
  5. Curbing overseas investments for a short time till the value of rupee improves to some extent. This will help strengthen rupee as it will keep the rupee in rotation in Indian market only.
  6. Permitting PSU oil companies to raise additional funds through External Commercial Borrowings and trade finance.

All these measures are good for a short term revival of the rupee for a longer run the following measures can be taken:

  1. Promoting rupee to become an investment currency and gradually a reserve currency like China is promoting its Renminbi. As Indian economy is growing its trade both inside and outside the subcontinent is growing it can urge traders to use Indian rupee as a currency for cross border trade, in the same manner as China is pushing its Renminbi as a currency for cross border trade especially in Asia. This will safeguard the future of rupee against the dollar, by reducing the dependency of rupee against dollar for international trade.
  2. The government should look to boost export and manufacture our imports locally like in case of urea which was used to import but now is majorly manufactured locally by licensed producers. This will help improve our forex reserve. Decrease the consumption of imported goods. The main culprit in this case is not foreign clothing brand, beverage manufacturers or multinational food joints. But it is rather something more common ‘Gold’.
    Gold is something that contributes nothing to growth and is of no use for its owner other than show-off. Some people buy gold as an safe investment but that also hampers our GDP since money in any investment is actually money in rotation within the country (for e.g. fixed deposit, Mutual fund, etc. all these investment will actually enable banks or mutual funds to maintain liquidity in market).
  3. Now in case of gold it will be just sitting in your safe and money you gave to buy it has gone outside India. All in all, it is stupid to buy gold. Yet we are, a country obsessed with yellow metal, the biggest importer of gold in whole world. Even china, a country much ahead from us in GDP, is behind us in gold import .We cannot afford this luxury at times like this when our GDP growth rate has fallen below 5%.
  4. Liberalizing Foreign Direct Investment (FDI) in sectors such as telecom, retail, etc. To bolster foreign investment in India leading to a better forex reserve.
  5. Minting money without improving economy is never a good option; the most recent example is the complete financial breakdown of Zimbabwe in 2009 which led to the complete dollarization of Zimbabwe. So, the government should try to come up with better financial policies which promotes export and increases market by FDI which increases the foreign reserve.
  6. The central bank should create new bond buying programs to secure the future of the currency like what the ECB is doing in the Eurozone to safeguard the euro currency.


The factors behind the depreciation of exchange rate of dollar to rupee were studied. A thorough study was done on the history of rupee to dollar exchange rate. Various causes and effects for the rupee free fall were pointed out and pondered upon. Factors such as prolonged inflation, current account deficit and low fiscal stimulus were examined and effects such as crude oil prices, costlier imports, etc. were enumerated. Based on this in-depth study, various short term and long term measures were proposed to stabilize and improve the condition of rupee against dollar and an analytical approach was also applied to support the facts.

By: Vaisakh Subrahmoni, Rishav Ankit, Nikhil Agrawal


• The Danger Index: why the fall of the rupee is home-made – Livemint
• Rupee – What leads to the change in the currency’s value? – Business Today

Leave a Reply