subject: INR and The Road Ahead [print this page] INR and The Road Ahead INR and The Road Ahead
The Indian Rupee has evolved to great acceptance Worldwide since its inception by Sher Shah Suri in the 16th century in the form of Copper coins when 40 copper coins were said to constitute Re 1. The period of relevance in its history is the 20th century. It is in this century that it underwent massive regime changes from being coupled to Pound Sterling in 1928 to the Dollar/Gold Standard in 1948 to a basket of currencies in 1973 and finally settling with the Floating Rate regime at the behest of the IMF in 1991. It may seem that the journey has been long and arduous but the benefits are for us and our future generation to reap. It is in the context of globalistion, liberalisation and privatisation that we shall study the impact of the present Floating rate regime the INR adheres to on the Indian economy in terms of business profitability, foreign debt and the prospects of INR as an International Reserve Currency.
The Indian rupee abbreviated as INR adopted the Floating Rate regime in 1991 when India opened up its Economy to the Rest of the World in tune to the promises she made to the International Monetary Fund (IMF). India also had to devalue its currency on two occasions in 1991, once on July 1st and then on July 3rd as per IMF pre-conditions to address its ballooning trade deficit. INR devaluation was a blessing in disguise for the Indian exporters in the form of incremental FOREX earnings as INR gradually depreciated primarily on account of India's inability to attract Capital flows because of an unhealthy business environment on account of sub-standard or non-existent infrastructural facilities, long gestation periods, lack of skilled labour, a subdued business environment because of lack of laws, licensing raj etc.
But the times have changed and so has the repute of the INR in the World community. As per UNCTAD Report 2008-09 India reported the highest growth of 85% YOY in its FDI inflows from $25bn to $46bn and was the 9th largest FDI recipient in the World in absolute terms. The adoption of the Liberalised Exchange Rate Market System (LERMS) and the External Commercial Borrowing norms have given the Indian entrepreneurs the much needed impetus to take their businesses abroad and raise capital from foreign markets in form of ADR, GDR, FCCB, and even approach the World Bank for cheaper and long term loans especially for social development purposes. For instance, a few of the major acquisitions by the Indian Companies abroad are the acquisition of Novalis by Hindalco, JLR and Corus by Tata, Zain Telecom by Bharti etc. These global acquisitions further cement the arguments in favour of INR's repute as internationally accepted currency. As India's bilateral ties further and strengthen, the Indian Rupee's demand has also increased on account of India's favourable trade balance with her trading partners. Recently India and Brazil entered into a Currency Swap agreement to boost their trade finances.
The other issue which needs due attention is that of excessive capital inflows. With India poised to post double digit growth in the coming years with its Economy entering Rostow's Take off stage, foreign entrepreneurs seek to take advantage of India's new and improved business environment. The INR is poised to appreciate dramatically in the coming time and thus pose a different kind of challenge for the Indian entrepreneurs. As the INR appreciates the Indian entrepreneurs who access the foreign markets to raise capital/loan would be advantaged as compared to those who do not. This implies that GoI along with RBI need to further liberalise their ECB norms to encourage the Domestic entrepreneurs to raise foreign loans as repayment of the foreign debt in INR terms would result in FOREX gain.
Another issue that needs to be urgently addressed is the fall in the book profits of the domestic firm having Transaction/Translation/Economic exposure. As the AS11 (accounting standards) require the firms' to make adjustment for the Mark-toMarket Gain/Loss in their balance sheet, any INR appreciation would have to be reported as FOREX losses thus reducing shareholder's wealth. This issue may be addressed by encouraging the firms with Foreign loans to go for CIRS (Currency and Interest Rate Swaps) and greater hedging opportunities. Currently only $-Re, Pound-Re, Yen-Re and EuroRe currency futures are available in the stock markets but as India's bilateral trade grows, she would need to introduce a whole new variety of Currency Futures if she needs to safeguard her economy against Exchange Rate volatility.
India has shown great resilience to the Financial and Economic crisis of 2008 but with changing times as it assumes greater responsibility on an International scale, she would need to ensure greater financial and economic stability of its domestic economy with the introduction of timely reforms and regulations as deliberated above.
