Analysis of Indian Rupee Depreciation Using Swot - Ahp Method

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Literature Review

WenShwo Fang and Stephen M. Miller (2002) used a bivariate GARCH-M model in order to study the negative relationship between currency depreciation and stock market returns in five Asian emerging economies after the Asian financial crisis of ’97-99. They were able to prove conclusively that currency depreciation significantly affected stock market returns in these countries. Syed Zahid Ali and Sajid Anwar (2011) examined the supply-side effects of induced currency depreciation. They suggested that the effects of currency depreciation included inflation, a better balance of trade and a decrease in output. They concluded that the depreciation of the currency has a positive effect on output but a negative effect on the balance of trade, subject to the fulfilment of the Marshall–Lerner conditions. Eiji Ogawa and Takeshi Kudo (2007) studied the effects of the depreciation of the US dollar in East Asian currencies. Their work suggests that different East Asian currencies will respond to different levels to the sudden depreciation of the USD, depending on their level of linkage with it.

Mikko Kurttila et al. (1999) utilized analytic hierarchy process (AHP) linked with SWOT in order to avoid some of the weaknesses of the latter. They concluded that the hybrid method of SWOT and AHP improves the information basis of strategic planning processes while providing an effective framework for learning in strategic decision support in numerous situations. It can also be used as a tool in decision making processes where multiple decision makers are involved. Ali Gorener et al. (2012) applied a combination of SWOT and AHP for a case study on a manufacturing firm. They were able to rank each of the SWOT factors based on priority within the group as well as the overall priority of the factors and thus determined the significance of each strategic factor to the manufacturing firm.

Sukran Seker et al. (2012) performed an analysis on a Turkish consumer electronics firm using SWOT-AHP method. They were able to make pairwise comparisons with the judgement of experts and thus obtain priority scales for SWOT factors Vasantha Wickramasinghe et al. (2009) applied the combined SWOT and AHP technique for tourism revival strategic marketing planning. Their proposed hybrid method is a unique decision making tool because of simplicity of the procedure, limited data requirement and transparency of the final outcome. Cengiz Kahraman et al. (2007) worked on the prioritization of e-Government strategies using SWOT-AHP analysis. Their work presents the possibility of making sensitivity analysis. They suggest that the changes in the importance of main factors can be seen by plotting sensitivity graphs.

Understanding the exchange rate

The correct exchange rate is usually determined by the market using the asset market approach where the value of the exchange rate is conditional upon the inflow and outflow of capital into and from the domestic economy.

Strengths

Increase in exports

The most effective strategy used to counter the economic instability (depreciation of currency) in the emerging markets is the increase in exports. By making use of the depreciating value of the currency the exports of a country can be increased due to the enhanced appeal of their products. In India, exports has increased by 5.86% from November 2012(USD 23250.94 million) to November 2013 (USD 24613.29 million)[link3].

2. Lowering NRI rate limits

When Non Resident Indians earn foreign currency and remit the same in India, the value of their earnings will be more due to the depreciating value of the Rupee. This factor will encourage NRIs to increase their investments in India. Understanding this, the RBI has also eased some of the rate limits for deposits for the NRIs in order to attract more investments.

3. Increased tax on Gold imports

Gold imports are one of the main causes of the current account deficit. Gold imports are responsible for nearly 30% of the trade deficit during 2009-10 to 2011-12 [link2]. In an attempt to narrow the burgeoning CAD, the government has raised import duty on gold by ten percent. As a result of this, the import of gold is expected to decrease during 2013-14.

4. Restrictions on investments abroad

The Liberalized Remittance Scheme was introduced by the RBI to simplify and liberalize foreign exchange facilities available to resident Indians. Because of the financial stress, the RBI has restricted the overseas direct investment by Indian individuals and corporate from USD 200000 per year to USD 75000 per year. The RBI has also abolished the acquisition of immovable property outside India using LRS [link6]. This action by the RBI was in response to the increasing overseas investment by Indians. Thus the RBI has prevented excess outflow of dollars from the country.

Weaknesses

1. Demand for US dollars

Owing to the withdrawal of foreign investments, the inflow of dollars has reduced has reduced drastically, while the demand for dollars in India has remained the same. This demand for USD is mainly because it is the standard for payment in the purchase of any import, most importantly gold and oil. This net decrease in the amount of dollars in India depreciated the value of the rupee.

2. Widening CAD

Current Account Deficit (CAD) occurs when a country's total imports of goods, services and transfers are greater than the country's total export of goods, services and transfers. For a developing country like India whose imports are always greater than its exports, a deficit is always to be expected. India had a current account balance of -4.8% of its GDP during the fiscal year 2012-2013 and this CAD has been steadily increasing during the first quarter of the fiscal year 2013-2014 [link1], thus bringing India’s economy down to a weak and fragile state.

3. Weak economy

India’s economy has suffered because it has a CAD. But a frail rupee will add fuel to the rising import bill of the country and thereby increase its CAD which will destabilize its economy. India’s CAD for the first quarter of the fiscal year 2013-2014 is at 4.9% of its GDP which is higher than the previous fiscal year [link1]. This state combined with the fact that there have been no strong resolutions by the government has driven away potential investors.