(The fall of rupee impact and role of RBI) The fall of rupee vs. Dollar has created the same conundrum what the rupee appreciation caused in year 2007. However, the impact has reversed this time with exporters making appreciated revenues and the importers feeling the heat. The increased demand for dollars vis-à-vis the India rupee has led to a sharp depreciation with rupee falling close to 18% from the Aug 2011 levels, and hitting an all time low of 54.32/USD on 15th December 2011, making it the worst performing Asian currency of the year. Taking a closer look at these issues, the fall in rupee can be attributed primarily to 3 broad factors. Firstly, the grim global economic outlook, essentially due to the European debt crisis. Due to turbulence in European markets, investors are considering dollars as a safe haven for their investments in the longer run. This led to an increased demand for dollars vis-à-vis the supply for rupee and thus the depreciation. Another line of thought could be that while investors are shifting from European markets, why are they not investing in the Indian markets? The Indian economic scenario for the entire 2011 has been plagued by high rate of inflation, hovering above 8%, and extremely low growth in manufacturing sector. The HSBC-PMI (Purchasing Managers index) fell to 51 in the month of December 2011. The cumulative effect of these factors is leading to a shift in investor sentiments towards dollar market. Secondly, the fall in rupee can be largely attributed to the speculations prevailing in the markets. Due to a sharp increase in the dollar rates, importers suddenly started gasping for dollars in order to hedge their position, which led to an increased demand for dollars. On the other hand exporters kept on holding their dollar reserves, speculating that the rupee will fall further in future. This interplay between the two forces further fuelled the demand for dollars while sequestering its supply from the market. This further led to the fall in rupee. Lastly, there has been shift of FII’s (Foreign institutional investors) from the Indian markets during the current financial year 2011. FII’s leads to a high inflow of dollars into the Indian market. As per a recent report, the share of India’s FII in the developing markets has decreased considerably from 19.2 % in 2010 to 3.8% in the year 2011. As FII’s are taking their investments out of the Indian markets, it has led to an increased demand for dollars, further leading to a spiraling rupee. Encompassing all these factors, there is a lack of firm initiative by government on issues such as allowing FDI in retail. Recent debacles such as 2G have further rendered the Indian market unattractive to a certain extent.
Posted on: Wed, 18 Sep 2013 18:17:36 +0000
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