Last fortnight has witnessed the plight of falling rupee(Rupee losing value wrt USD).Here is a little brush-up: Factors affecting Rupee slide: 1.Uncertainty in the global economy. Eurozone crisis and policies in US are feeding into it. 2.Capital flows to India and risk on/off behaviours are closely related. Risk-on creates a favourable disposition towards emerging economy investment, leading to surge in FIIs flows and vice-versa. 3.LTRO of European central bank, proposed banking union in eurozone, launch of permanent European stability mechanism and QE3 in US are among chief variables preventing the rupee slide due to risk-on environment(capital-inflows) 4. Proposed end of QE3 in US is the main reason for recent slide creating risk-off environment(capital out-flows) 5.There is increasing tendency amongst investors for ‘flight to security’. USD seems the safe haven to them. 6.Credit rating agencies’ downgrade has also affected investment climate in India. 7.Exports are impacted by adverse conditions in Eurozone, widening the CAD. It also leads to depletion of forex and rupee slide. 8.India has witnessed the persistent high inflation in last 2yrs,worsening the overall economic prospects. 9.Higher interest rates attract investors. But due to slow down, RBI is under pressure to cut interest rates. Expecting rate cuts investors tend to stay away. 10.Lack of reforms on key aspects like DTC,GST,GAAR and fiscal consolidation. CONSEQUENCES OF SLIDE: 1. Imports costly 2. Oil import bill increases. 3. Some relief for exporters. 4. Negation of decrease in global commodity prices. 5. Domestic inflation increases (Import push inflation) as India structurally is import intensive country. 6. Increase in external debt in Rupee-terms 7. Negative investor sentiment 8. Implications for credit profile. Measures to stem slide: 1. Making investment attractive: Easing capital controls(increasing FII limits,liberalization of FDI norms) 2. Selling of forex by RBI 3. Issue of sovereign bonds 4. Key reforms like DTC,GST,FDI in aviation and retail, oil subsidy reforms, increasing ECB limits and amendments in companies bill Remarks: INR is not the only currency that depreciated. All major Asian currencies depreciated wrt USD. In times of uncertainty investors prefer USD as a safe haven. Future of eurozone will impact the exchange rate climate. Last but not the least, stable political and economic environment is required in country to tide over exchange crisis.
Posted on: Fri, 28 Jun 2013 08:56:22 +0000
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