why indian rupee is depreciating against dollar

Since July last year, the Indian rupee has fallen by more than 27% against the US dollar, one of the biggest declines among Asian currencies. Since India imports more goods (in value terms) than it exports, it results in a huge imbalance in trade, or what is called a trade deficit. In the financial year ending March 2012, the deficit zoomed to $185bn (бе118bn) compared with the original estimate of $160bn. India's Commerce Secretary Rahul Khullar has predicted that the trade deficit may be slightly lower in 2012-13, due to falling global crude prices and recent government curbs on gold imports. A $1 per barrel decrease in crude price reduces the country's deficit by $900m at existing import volumes. On the flip side, India's export performance may prove to be a dampener this year. Mr Khullar has added that India will be lucky if exports, which grew 21% in 2011-12, manage to witness a growth rate of 10-15% in 2012-13, due to the crisis in Europe and slow economic recovery in the US. Although India has become an attractive destination which can woo foreign capital as well as money from non-resident citizens, it is not enough to make up for the trade deficit. In 2011-12, India received foreign direct investment of more than $30bn, in addition to a net inflow of $18bn from foreign institutional investors in stocks and bonds. But uncertainty about India's commitment to economic reforms, retrospective taxes, and policy paralysis within the government have forced foreigners to either postpone their investment decisions, or take money out of Indian stock markets. The country's current account deficit - a broader measure of the trade deficit - has also ballooned due to the above reasons. In 2011-12, this deficit was more than $74bn, a huge jump from less than $46bn a year ago.


In 2012-13, it may be even higher at $77bn. The result is that India's foreign exchange reserves have dropped from a peak of $320bn in September 2011 to $290bn now. In such a situation, more people tend to sell rupees to buy dollars (or any other foreign currency that they require). Importers scamper for dollars to cater for their needs to buy goods abroad. Exporters cannot bring in enough dollars; in fact, they keep their foreign earnings abroad as they expect the rupee to fall further. Meanwhile, foreign investors increase the demand for dollars as they convert their rupee assets into dollars to take their money out. This demand-supply gap between the dollar and the rupee leads to devaluation. This trend is accentuated by low growth and high inflation in India. After annual economic growth of nearly 9% in 2009-10 and 2010-11, the country is likely to grow at 6. 5% in 2011-12. The expectations for 2012-13 are not too encouraging. Couple this with high inflation due to high food and fuel prices. The rate of inflation may rise this year to double digits if the government is unable to curb its fiscal deficit. In this scenario, most foreigners as well as Indians tend to take money abroad, or keep it away from India. Global investors are also nervous about investing abroad in nations such as India due to the economic crisis in their respective countries. That has added further selling pressure on the rupee. The Reserve Bank of India's bid to sell dollars in the open market to restrict the rupee slide has failed in the past few weeks and months. This has complicated the situation further. Once currency traders and speculators realise that India's central bank is unable to manage its exchange rate, and reduce the adverse impact on its currency, they may enter the market in a big way to sell the rupee.


As a result, the rupee may devalue more than it should. Experts, who a few weeks ago predicted that the Indian currency might stabilise at 55 rupees to the dollar, now say this may happen at 60 rupees.
Like the stock markets, the has been witnessing turmoil against the dollar ever since the beginning of this year. The Indian currency tested the 28-month low of 68 against the dollar on Wednesday, last seen in September 2013. The domestic unit opened lower at 67. 77 per dollar on Wednesday as against Tuesday s closing level of 67. 65 and breached 68 level for the first time since September 4, 2013, to hit intra-day low of Rs 68. 07, down 42 paise and closed at 67. 95/96 against the dollar. The rupee had hit the record intra-day low of 68. 85 in September 2013. It had last touched 68. 62 a dollar on September 4, 2013. Finance Ministry on Wednesday said it is keeping a close watch, along with, on the domestic currency s movement and hoped that market volatility will stabilise soon. The central bank and the finance ministry we are keeping a close watch. We are monitoring the situation. We are in constant touch and the central bank will deal with the situation as and when required, Das said. On Thursday, the rupee after a brief recovery again breached the 68-mark in late morning deals, depreciating by 10 paise to 68. 05. The domestic unit resumed higher at 67. 88 per dollar as against Wednesday s closing level of 67. 95. Later, it slid to 68. 06 before quoting at 68. 05 at 1040 hrs onб Thursday. The rupee started at just above 66 on January 1, 2016 but since then has been moving sharply downwards with the currency crossing the 67 level on the January 14, 2016 and the 68 mark on the January 20.


БThis movement was quite unexpected as the fundamentals had justified a level of 65-66,Б said a CARE Rating report. 1. Global economic slowdown: This the major factor which is contributing to both the stock markets and Indian currency fall. ChinaБs yuan devaluation has also been hurting the sentiments globally. China has been witnessing a slowdown, with the International Monetary Fund has reiterated and while slashing the global growth forecasts for the third time in less than a year on Tuesday (Jan 19). IMF has cited a sharp slowdown in China trade and weak commodity prices that are hammering Brazil and other emerging markets. 2. Crude oil prices: US is the biggest importer of crude oil. So when the crude prices go down, it means US will be saving more dollars to buy it, as a result dollar as a currency strengthens, leading to fall of Indian rupee and other currencies at the forex market. 3. FIIs have been in the sell off mode in equity segment for last 3 months. From Jan 1 to Jan 20, foreign institutional investors (FIIs) sold shares worth Rs 7,146 crore in the domestic equity markets. On the other hand, domestic institutional investors, or DII s net buying stood at Rs 9,249 crore during the same period. 4. India s Trade deficit: Exports contracted for 13th month in a row in December 2015 as outward shipments shrank 14. 75 per cent to $22. 2 billion amid a global demand slowdown. Imports too plunged 3. 88 per cent to $33. 9 billion in December over the same month previous year. Trade deficit during the month under review widened to $11. 6 billion as against $9. 17 billion in December 2014.

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