Indian Rupee Volatility




Due to the recent fluctuations in the foreign exchange market in India, it is highly essential to focus on the concepts related to this.


Good money must possess certain qualities. The most important among them is its acceptability – means that all the people must accept money with confidence that its value will remain and can be used for exchanging goods and services within the territorial jurisdiction of that country. Money has acceptability, because it is made legal tender by the act of parliament (in countries that are constitutionally established to do so.  
Legal tender is defined as a legally valid currency (in specified denominations) that may be offered in payment of a debt and that a creditor must accept in redemption of a debt as per a law of the land. Denomination of country's paper currency and coins acceptable as legal tender varies from country to country. Cheques, credit cards, debit cards, Checks and postal orders are not legal tenders and are accepted only at the option of the creditor, lender, or seller are also called lawful money

In some countries legal tender can be refused as payment if no debt exists prior to the time of payment; that means the obligation to pay arise at the same time of offering the payment. For example:   transport staff does not have to accept the largest denomination of banknote.  The payment for vending machine is possible only with the specified denomination of currency or coin. Shopkeepers may reject large banknotes: this is covered by the legal concept known as invitation to treat. Invitation to treat is a contract law term. It comes from a Latin phrase which means "inviting an offer". An invitation to treat is “an expression of willingness to negotiate. A person making an invitation to treat does not intend to be bound as soon as it is accepted by the person to whom the statement is addressed."
 
Here, the matter to be considered is, whether we accept it or refuse it to settle the debt but the value. In the wake of Indian rupee volatility, the question to be dealt with is whether the people were losing their confidence in the currency or what is the fair value of the Indian rupee or in other sense, can it regain its value back to a stable level. Value, in economics, the worth of a commodity or service measured against other commodities or services. The value of any object in the marketplace is determined by desirability and scarcity. But the value of money cannot be measured in terms of money; therefore it is measured in terms of the price of other commodities that can be bought with money. These are the questions generally layman ask, for which there is no definite answer.  One can see the value of the rupee in terms of other currency.  This market value may also be referred to as the exchange rate.

According to the pricing theories, price of anything in a free market is determined by the forces of demand and supply. According to this analysis, both short supply and excess demand cause, to push the price high. There are many vital aspects which lead to this shortage of supply and or excess in demand. 

India is one among the rapidly growing economy in the world, and which requires huge quantum of energy. India is not self-sufficient with her energy resources. The major energy source used in India is oil and around 70 percentage of India’s oil consumption is depending on imports. It causes an increasing demand for foreign exchange (mainly US$) to pay the imports.  

In the beginning of the volatility, in order to control, the government will take short term measures. One  such measure was Central Bank’s (Reserve bank of India) restrictions of capital withdrawal by corporates and individuals then, which caused concern among overseas investors that the government is on the verge of financial crisis, (Earlier, in the 1999 due to balance of payment deficit, Government of India put up strict control over capital) aggravated the position of foreign investors and they either pulled back by selling $701.4 million worth of shares during this time, and now they are reluctant to invest in India for the time being. 

The speculation in the currency market in the short run led the rupee breaking the 64 to a dollar. Its impact in the economy is alarming and the same is reflected in the stock market as well as the commodity market. Over and above this, in order to meet the forthcoming festival season’s growing demand, a panic trade in the commodity markets carried the Gold prices to Rs. 3170 per gram.

Earlier this year, Indian economy estimated to grow close to five per cent in the April-June quarter of 2013-14, is strained by the widening current account deficit and the volatile rupee.  Experts forecast that Rupee may fall down further as dollar is demanded due to the increasing defence and oil import requirements.

The rate of Inflation affects the exporters badly and boost imports cause another burden on the balance of trade deficit which in turn affects the currency prices.

Administrative issues regarding the economic instruments used, use of economic theory and its forecasts will have conflicts in its opinion of choice, data, and implementation. The strength of the economic instruments depends on the accuracy of information gathered and the interpretation in the economic models used.  The delays involved in government machinery, the time taken to recognize the problem, time taken to formulate policy measures, time taken to implement the policy and time taken by people and firms to react to the policies is all important factors influencing the market reaction on finance.

Although, economic advisers may recommend certain economic measures, due to political influence a government may choose to ignore the advice or postpone the implementation as they are against their political popularity.  The civil servants’ and politicians’ self-interest which also may be influenced in policy decisions even if it is not in the country’s interest such as dealing with corruption, externalities and so on.  

Even with all these shortfalls, the Indian government is finding the ways to shore up foreign capital to bridge the widening current account gap and stabilitse the currency volatility.