Rupee Plunging Down Against Dollar

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Rupee Plunging downagainst Dollar

Reasons Impact and Remedial Measures

Shekhar Mishra


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INR/USD exchange rate based onRBI reference rate


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FY 2012 ESTIMATES

Imports>Exports

$470bn>320bn

-$150bn Trade deficit

+$90bn Service Revenue

-$60bn Net deficit


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How the Value of Rupee isdetermined against anothercurrency?

Exchange rates are expressed as a comparison oftwo currencies. It is always relative and can bemeasured between two countries.


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Demand and Supply

More demand, less supply,more will be the value ofthe currency. This is the basic principle ofeconomics!


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Reason behind the downplunge.

Rising dollar demand by oil companies Oil companies need $400

million a day. Ever-growing demand for gold imports has alsoseverely hurt the rupee.

Foreign institutional investors shying away from India June FIIinflows fell to Rs 2,176 crore. The FIIs have been moving awayfrom the emerging economies in the recent times. The recent

downgrading of Indias rating by the credit rating agencies such asS&P and Fitch has also hit Indias image as an investmentdestination.

Strengthening of Dollar: The Euro-Zone crisis has weakened theEuro significantly against the US Dollar. In other words dollar is

getting stronger in the world markets. Obviously the investors areconsidering US as safe place to invest in.

American money market funds are exiting Europe, hittingcontinental banks that fund Indian companies.


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Reason behind the downplunge.

A widening current account deficit due to insufficientexport earnings: India currently runs a $180 billion tradedeficit.

The high rate of inflation erodes the value of rupee andthus calls for continuous downward adjustment againstthe dollar for maintaining the proper parity value.

A persistently high fiscal deficit has also seriously hurt theeconomy and has eroded investor confidence.


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Impact of rupee depreciation

Inflation graph and Fiscal deficit to scale up.

Negative impact on FII flows to Indian market.

Negative impact on Indian students and travelers abroad .

A blow to Indian Importers.

Impact on domestic consumers.

Cheerful news for Exporters.


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What can RBI AND GOVERNMENTDO TO PREVENT FURTHERDOWNFALL?


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Remedial measures

Reducing the speculative trading (Reforms in EEFCAccounts)

Reforms in FCNR Accounts.

Selling of Forex Reseve.

Policy reforms to improve FDI in India.

Reduce Gold import (current account deficit).


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Remedial measures

Sovereign backed NRI Bonds.

India Sovereign backed Bonds.

Allow banks to borrow from abroad.

Allow QFIs from Non FATF Nations to invest in India.

Dollar window for oil reforms.


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Sources and references

http://economictimes.indiatimes.com/markets/forex/rupee-depreciation-who-gains-who-loses/articleshow/14348051.cms

http://videos.livemint.com/2012/06/22223135/Is-rupee-depreciation-a-welcom.html?atype=tp

http://www.thehindu.com/opinion/editorial/article3439613.ece

http://expertscolumn.com/content/causes-indian-rupees-depreciation-vs-dollar

http://sushantsupriya.com/2011/12/17/causes-of-indian-rupee-depreciation-in-2011/

http://www.thinkplaninvest.com/2011/09/what-is-the-reason-behind-rupee-value-

depreciation/

http://expertscolumn.com/content/wholl-fall-faster-rupee-or-government

http://businesstoday.intoday.in/story/rupee-fall-against-dollar/1/18929.html

http://profit.ndtv.com/News/Article/rupee-opens-weaker-against-dollar-retraces-

gains-305170htt ://www.thehindu.com/news/national/article3446183.ece


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Rupee Plunging Down Against Dollar

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