Sunday, 21 June 2015

What are the reasons for Rupee falling against the Dollar?

cropped-banner.jpgAs with all of economics, there is no one factor that can be said to cause the depreciation in the Indian rupee. Here are some possible reasons:

1.Current Account Deficit: The rising current account deficit possibly due to the severe problems that the Euro zone is facing is a probable candidate. Note that the Euro Zone is one of India's major trading partners. The rising current account deficit has depleted our foreign exchange reserve and thus led to a fall in the value of the rupee.

2. Foreign Institution Investments (FII): there has been a withdrawing of foreign institutional investments due to global uncertainty. Due to global uncertainty, investors are moving away from risky (read India) to more stable investment locations

See the first table on the right: (Foreign Institutional Investors Activity Details| Market Statistics)

3. Persistent Inflation: India has had high persistent inflation over the last two years. Inflation erodes the value (both in terms of quantity exchanged for another currency as well as trust in the currency) of a currency.

Here's a look at the CPI index:

4. Other factors such as the interest rate differential, political uncertainity (election uncertainity) too play a role.

Pros:
1. It makes India's exports more competitive.
2. Debtors whose debt in denominated in rupees against foreign firms/individuals will have their real debt lessened.


Cons:
1. Depreciation makes our imports more expensive. This means that it could feed into the consumption basket and hence cause inflation.
2. For companies/individuals with fixed contracts in rupees (with a foreign firm) there will be huge losses.
3. Creditors whose credit is denominated in rupees as against foreign firms will lose out as their real credit falls.

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