What does currency erosion stand for?

Its a gradual decline in the value of a country currency with respect to another country currency

TRADE BALANCEIMPORT>EXPORT=DEFICIT strengthen $

EXPORT>IMPORT=SURPLUS strengthen INR

INDIA U.S.EXPORT $6000

IMPORT $10000

due to deficit in trade the reserve of foreign currency going to decrease . Which directly causes the demand of $4000 AND we need huge amount of foreign currency.A shift in the trade balance between two countries tends to weaken the currency of the country with greater deficit.

WEALTH Wealth is a country‘s reserves, in the form of gold, cash, foreign reserve

natural resources. Basically any factor that affects a country's ability to repay loans finance imports, and affect investments impacts the market's perception of its currency and the currency's value.

Less Gold, cash,Foreign reserve

Currency source

U.S.

payment

$

goods

$=65.50

Gold, cash

Interest Rates

More interest rate More returnLow interest rate Low return

example-:Let A has INR1000

There are 2 countries U.S. and INDIA with different I/R

U.S. with 15% INDIA with 10%So que. where A should invest

Obviously In U.S.Because its business all need high

return and he will out flow it to U.S.

INFLATIION Inflation reports monitor the rise of the prices of basic

goods and services in an economy, inversely the rate at which purchase power is falling. Think of it as a measure of how much you can buy with a rupee.

EXAMPLE-: if you can buy a quart of milk for INR20, after a 2%

inflation, that same quart will cost INR24. The main cause for a higher inflation rate is a growth of money supply without an equal growth in the country’s assets

Current Account

The current account deficit is a broader measure that includes the trade deficit and is itself part of a broader measure, the balance of payments.

The balance of payments is the sum of all transactions between a nation and all of its international trading partners.

In addition to the trade deficit, the current account deficit includes factor income and financial transfers. Balance of payments fluctuates exchange rate of its domestic currency. 

GEOPOLITICAL CONDITIONS

Elections in country or in other country

Tax policies

Natural disasters

Stability

Global crisis

Rating agencies

Wars and attacks

Government Debt

Government debt is public debt or national debt owned by the central government.

Govt debt

less foreign capital inflation

FII

open mrt sellingFall in value of INR

The Indian currency has witnessed a slippery journey since Independence. Many geopolitical and economic developments have affected its movement in the last 66 years.

When India got freedom on August 15, 1947, the value of the rupee was on a par with the American dollar. There were no foreign borrowings on India's balance sheet.

.

JOURNEY SINCE INDEPENDENCE

To finance welfare and development activities, especially with the introduction of the Five-Year Plan in 1951, the government started external borrowings. This required the devaluation of the rupee.

After independence, India had chosen to adopt a fixed rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966.

Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar.

The rupee's link with the British currency was broken in 1971 and it was linked directly to the US dollar.

In 1975, value of the Indian rupee was pegged at 8.39 against a dollar.

In 1985, it was further devalued to 12 rupee against a dollar.

The next round of weakness in the Rupee came in the wake of the Bofors scam which toppled Rajiv Gandhi’s government plunging the Rupee to new lows of

$= 12.36 In the year 1990 this rose to $=17.50

In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth and the foreign reserves were not even worth to meet three weeks of imports. Under these situations, the currency was devalued to 17.90 against a dollar.

To fill in this gap India borrowed large amounts from the International Monetary Fund’s (IMF) with an obligation to devalue the Rupee. The Rupee hit new lows with 1 US$ = 24.58 INR by the early-nineties from Rs.16.31/1$

1993 was very important. This year currency was let free to flow with the market sentiments.

The exchange rate was freed to be determined by the market, with provisions of intervention by the central bank under the situation of extreme volatility.

This year, the currency was devalued to 31.37 against a dollar. The rupee traded in the range of 40-50 between 2000 and2010

It was mostly at around 45 against a dollar. It touched a high of 39 in 2007.

2008-the global crises The Indian currency has gradually depreciated since the

global 2008 economic crisis. when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas.

In 2011- sharp drop in foreign investment, which tumbled from $6.5 billion in June to $616 million in September.

Indian companies borrow money in foreign currencies from outside the country because of lower interest rates. Indian companies borrowed close to $29 billion in foreign currencies.

Current account deficit was $97.9 bn

In 2013 Less in flow -FDI inflows in India registered a decline of 38%, to $22.42

billion, in 2012–2013, compared to $35.12 billion in 2011–2012 Markets were further spooked by the withdrawal of two of the largest

projects ArcelorMittal (MT), in Odisha POSCO (PKX), in Karnataka. The combined investment value of both

projects was approximately $13 billion, or about 15% of the CAD in 2012–2013

Record current account deficit of $88.2 billion in 2012–2013 In November 2013, Indian inflation reached 11.24%.

India is a net importer of oil. It has to buy oil in dollars. Therefore, rising oil prices worsen India’s current account and also weaken the Rupee. More Indian’s Rupee’s have to be spent on buying oil. It was $88/barrel in 2011 and by the 2013 it was $110/barrel

IN 2014 PROFIT-BOOKING IN INDIAN MARKETS The Indian markets have been witnessing profit booking. The

benchmark indices have cracked nearly 1 per cent in the month of August so far.Foreign funds have sold $363.48 million worth equities and $440.15 million worth of debt so far this month, bringing down total inflows so far this year to $25.60 billion.

STRONG US DOLLAR The US dollar was came strong against other currencies

on the hopes of revival in the US economy. The US services sector surged to an eight-and-a-half year high in July. The US index's rise beat analysts' forecasts. The US factory orders also rose, above analysts' expectations, at 1.1 per cent in June.

GEO-POLITICAL TENSIONS

Hostilities among Russia and Ukraine and unrest in the middle-east can have a sharp impact on global economy as they threaten to disturb global oil market.

According to reports, ISIS has captured a number of towns in northern Iraq, and is close to seizing Iraq's largest dam. ISIS now controls Ain Zalah oil field, adding it to the four oil fields it already controls.

Escalation of tension can lead to a sharp rise in global crude oil prices. India is a major importer of crude oil and demand for dollars could lead to decline in the rupee value.

Have a look over how

INDIAN currency affected by

political interval?

RUPEE IN 2015 &CAUSES of erosion

The Demand for US $

demand for the US currency from Indian importers and foreign investors looking to hedge their investments in India following the sharp fall in the local currency. dollar demand was strong from state-owned banks, likely on behalf of their public sector clients like oil companies or for government defense linked purchases.

ON Tuesday 11 august 2015 China decided to devalue Yuan 2% against $US

Yuan devaluation will affect Indian exporters and manufacturers, also it will continue to keep the rupee under pressure.

Yuan devaluation will affect the Indian exporters because Chinese exports in comparison become better in position.

India has a large trade deficit with China of around $77.6 bn in 2014-15 which is almost doubled over the last ten years. Rupee need to depreciate to keep its exports to China and the rest of the world competitive at a time when external demand is weak.

DEVALUATION OF YUAN

Fears of low growth India has targeted an economic growth rate of 8.5% for

fiscal year 2015-16, compared to 7.2% in fiscal year 2014-15. The World Bank forecast a growth rate of 7.9% for the economy

If good rating =good inflow of foreign currency If less rating =outflow of foreign currency

Moody’s lowered its India growth forecast by half a percentage point from the 7.5% it estimated earlier. 

OFFLOADS BY FII’s Heavy offloading in portfolios by foreign investors and global

traders also led to the sudden rupee weakness

Foreign institutional investors, key to the fortunes of domestic equity, poured $50 billion since last May 2015

FIIs have aggressively sold shares in the cash market over the last few sessions. They have also reduced their exposure in Indian bonds, which has led to dollar outflows and pressured the rupee.

High volatility in INDIAN stock market and less stability .