Rajeev Chandrasekhar's official website - Member of Parliament

 

GOVERNMENT OF INDIA

Ministry of Finance

 

RAJYA SABHA

UNSTARRED QUESTION NO 2386

TO BE ANSWERED ON 23.12.2008

 Depreciation of Indian Rupee.

2386.

SHRI RAJEEV CHANDRASEKHAR

 

 

 Will the Minister of FINANCE be pleased to state:-

(a)        whether Government has taken note of the recent serious depreciation of Indian rupee vis-à-vis US dollar which has the effect of pushing up the prices of imported goods in Indian market; and

(b)        if so, the extent of depreciation of Indian rupee during the last three months and the steps proposed by Government to restore the value of Indian rupee in relation to US dollar at a reasonable level?

ANSWER

MINISTER OF STATE IN THE MINISTRY OF FINANCE

(SHRI PAWAN KUMAR BANSAL)

(a)    & (b): The exchange rate of the rupee moved from Rs.39.97/US $ as on end-March 2008 to Rs.44.21/US $ on September 1, 2008 and further to a peak of Rs.50.52/ US $ on December 2, 2008. US dollar gaining strength against major world currencies, outflows on account of FII, increased recourse to hedging by importers, reduced capital inflows and widening trade deficit arising from elevated levels of global oil and commodity prices in the first half of the financial year are some of the factors that could be attributed for the depreciation of the rupee. The index of Real Effective Exchange Rate

(REER) of the rupee (6 currency trade based weights with 1993-94 as base year), which is a weighted average of nominal exchange rates adjusted for relative inflation differential between India and foreign countries (the major trading partners of India) is a better indicator of the value of the rupee. The REER fell from a level of 110.87 in March 2008 to 101.98 in October 2008 and further to 100.74 on November 21, 2008. The details of the depreciation of the rupee in the last three months are given in the Table below.

               Table: Movements of the rupee/REER in the last three months
Month
Rs per US dollar
Depreciation in Rs. Per dollar over previous month
REER 6 currency, 1993-94 base
Depreciation in REER over previous month
1
2
3
4
5
September,2008
45.56
5.82
106.89
3.95
October, 2008
48.66
6.35
101.98
4.59
November, 2008
49.00
0.71
100.74*
1.21
* as on November 2, 2008

The exchange rate policy in recent years has been guided by the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed target or a pre-announced target or a band, while allowing the underlying demand and supply conditions to determine the exchange rate movements over a period in an orderly way. With a view to alleviating the adverse impact of the turmoil in international financial markets (since mid-September 2008) on the domestic forex market, a number of measures have been taken, which inter alia include:

  • The RBI would continue to sell foreign exchange (US dollars) through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps.
  • The RBI would conduct special market operations to meet the foreign exchange requirements of public sector oil marketing companies against oil bonds.
  • The interest rate ceilings on FCNR (B) and NR(E)RA term deposits were increased in stages.
  • External Commercial Borrowings (ECBs) norms relaxed: (a) All-in-cost ceilings for ECBs for average maturity period of three years and up to five years have been enhanced to 300 basis points and over five years enhanced to 500 basis points above LIBOR; (b) The overall ceiling for ECB has been increased;
    (c) Definition of infrastructure expanded to include mining exploration and refining sectors for the purposes of ECB; and (d) 3 G Spectrum will be considered an eligible end-use.
  • All-in-cost ceiling in respect of trade credits have been raised (by up to 125 basis points) to 200 basis points over LIBOR [from LIBOR + 75 basis points].
  • Provision of forex swap facilities to Indian banks with overseas branches.
  • Allowing Banks to raise overseas borrowings from their head-office/overseas branches/correspondents up to 50 per cent of their unimpaired Tier-1 capital as against 25 per cent earlier.