What causes the rupee to depreciate? Reasons which cause the rupee to fall in comparison to dollar are: • Demand Supply Rule: The value of rupee follows the simple demand and supply rule of economics. If the demand for the dollar in India is more than its supply, dollar appreciates and rupee depreciates. Similarly, when the supply of dollars in India increases its demand, the value of dollar decreases in terms of rupees. Demand for dollars may be created by importers requiring more dollars to pay for their imports or by FII’s withdrawing their investments and taking the dollars outside India, thus creating a shortage of dollar supply, which in turn can also increase the demand for dollar. On the other hand, supply can be created by exporters bringing in more dollars from their revenues or FIIs bringing more dollars in India to spur their investments. • Dollar gaining strength against the other currencies: The central banks of Eurozone and Japan are printing excessive money due to which their currency is devalued. On the other hand, US Fed has shown%2 devalued. On the other hand, US Fed has shown signs to end their stimulus. Hence, making the US dollar stronger against the other currencies including the Indian rupee, at least in the short term. One doesn’t really know when Helicopter Ben will shut the door and stop the printing of money, though one doubts whether the door will be shut anytime soon. • Oil prices: Oil price is one of the most important factors that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. In International markets, prices of oil are quoted in dollars. Therefore, as the domestic demand for oil increases or the price of oil increases in the international market, the demand for dollars also increases to pay our suppliers from whom we import oil. This, increase in demand for dollar weakens the rupee further. • Volatile domestic equity market: Our equity market has been volatile for some time now. So, the FII’s are in a dilemma whether to invest in India or not. Even though they have brought in record inflows to the country in this year chances are they may be thinking of taking their money out of the equity market which might again results in less inflow of dollars in India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar. Now, let’s understand the mechanism of the impact of this currency depreciation. How, for some people it helps to make huge earnings and for some it incurs huge losses. Following are the points which tries to explain the advantages and disadvantages of a falling currency:
Posted on: Sun, 30 Jun 2013 09:31:38 +0000
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