The recent depreciation of the value of Indian Rupee has created a furore. With the public looking apprehensive,the government trouble shooting and an apparent 2nd Asian financial crisis looming,it is a mess all around.Many reasons have come to the fore regarding this and I was all the more intrigued by them because it seems the pit, into which the Rupee has fallen looks bottomless.Anyway, so I had this conversation with my father related to this and here are some of the reasons which I could comprehend.
1.Widening Current Account Deficit:The Current Account Deficit or CAD,which in lay man terms, is the difference between what India earns from the rest of the world by exporting and what it pays them by importing, is pushing up demand for the Dollar.Trading all over the world is majorly done in US Dollar,which is a widely accepted currency.With India's imports being more than its exports, it needs to make these payments in Dollar.This in turn drives up the demand for Dollar.With the demand exceeding the supply, the value of the Dollar shoots up,which results in one shelling out more Rupees to buy a Dollar. This is just like inflation affecting onions.More demand, less supply, price goes up.
2.Policy Inaction:Another generous contributor.Foreign investors see a lack of clarity in the policies framed by the government for the setup of an environment in which the investors can function.Be it the clearances involved from the different ministries or restrictions imposed on capital flow eg:- increase in CRR, all prove to be a hinder to attracting investment.
3.Falling Foreign Exchange Reserves:India's foreign exchange reserves are enough to cover imports of 7 months only.Foreign Exchange is basically income earned by India.So if the government needs to meet the demand of the dollar, lets say for its imports, it needs to spend from its foreign exchange reserves by converting Rupee into Dollar.
4.Economic Slowdown:India's GDP growth fell to a decade low of 5%in 2012-13 and 4.5% in the January-March quarter. As a result foreign investors are loosing confidence in investing further.
5.Recovery in the US: Another big factor.Recovery of the US economy is making the Dollar stronger against other currencies.This will encourage foreign investors to put their money there, in the US, for better returns also subsequently resulting in withdrawal of investment from India.
Well thats about all that I could understand and believe is behind this fall of the Rupee.Lets keep our fingers crossed and hope for the best.
1.Widening Current Account Deficit:The Current Account Deficit or CAD,which in lay man terms, is the difference between what India earns from the rest of the world by exporting and what it pays them by importing, is pushing up demand for the Dollar.Trading all over the world is majorly done in US Dollar,which is a widely accepted currency.With India's imports being more than its exports, it needs to make these payments in Dollar.This in turn drives up the demand for Dollar.With the demand exceeding the supply, the value of the Dollar shoots up,which results in one shelling out more Rupees to buy a Dollar. This is just like inflation affecting onions.More demand, less supply, price goes up.
2.Policy Inaction:Another generous contributor.Foreign investors see a lack of clarity in the policies framed by the government for the setup of an environment in which the investors can function.Be it the clearances involved from the different ministries or restrictions imposed on capital flow eg:- increase in CRR, all prove to be a hinder to attracting investment.
3.Falling Foreign Exchange Reserves:India's foreign exchange reserves are enough to cover imports of 7 months only.Foreign Exchange is basically income earned by India.So if the government needs to meet the demand of the dollar, lets say for its imports, it needs to spend from its foreign exchange reserves by converting Rupee into Dollar.
4.Economic Slowdown:India's GDP growth fell to a decade low of 5%in 2012-13 and 4.5% in the January-March quarter. As a result foreign investors are loosing confidence in investing further.
5.Recovery in the US: Another big factor.Recovery of the US economy is making the Dollar stronger against other currencies.This will encourage foreign investors to put their money there, in the US, for better returns also subsequently resulting in withdrawal of investment from India.
Well thats about all that I could understand and believe is behind this fall of the Rupee.Lets keep our fingers crossed and hope for the best.
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