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Why the rupee is still declining?


TIRTHA RAY 
posted on 09 August 2013



Let us walk around the various reasons why the rupee is still falling regardless of RBI interference to twig it

 

The turn down in the value of the rupee against the dollar does not give the impression like coming to an end shortly. The Indian rupee has fallen in value to record lows in recent weeks, hitting an all-time low of 61.21 against the US dollar earlier this month to recovery after some intervention by the India's central bank - the Reserve Bank of India. The Reserve Bank of India - has recently announced liquidity tightening measures to arrest decline in rupee, but experts say that is likely to further choke growth. The instability of the rupee has been a cause of concern for importers. Exporters, non-resident Indians (NRIs) and others who have to deal with cur­rency conversion. The rupee has depreci­ated more than 11 per cent From Rs.54.36 per dollar until April 2013. In spite of everything, there is no obvious sign of any break or turnaround in the downgrading of the rupee, but there are rumours of the rupee on the way out further, let us study the reasons behind the decline.
 

 

Quantitative Easing (QE) by Federal Reserve: After the meltdown of 2008-09, the US cen­tral bank—the Federal Reserve—began providing easy liquidity to the US econ­omy through a process called quantita­tive easing (QE). Quantitative easing means buying of assets by a nation's central bank in order to inject money into the financial system. The US Federal Reserve has used this method to provide easy money to banks so that they can lend to businesses at cheap interest rates for expansion and thus stimulate growth. The move is expected to create more jobs in America. The priority for US central bank is to stimulate growth in their country. The intention of quantitative easing is not to affect the world. However, since financial markets are inter-connected, any step by US Federal Reserve to put easy money in markets influences the world including Indian markets. With the proceeds becoming attractive in the US, coupled with a lack of liquidity support by the Federal Reserve, the Flls started to drag their money from India. The outflow of the dollar far exceeded its supply, leading to a fall in rupee value, The recent US job data released on 12 July showed 190,000 new jobs being added in the US in June alone. This, together with rising home prices have confirmed strong US recovery and pushed US bond yield to a further high, It would also increase the comfort of the Federal Reserve and It may even postponed its decision to retract the QE from September.

 

Domestic factors: The country with soaring exports will be happier with a depreciating currency; the same does not apply for India. India, on the other hand, does not enjoy this luxury, Euro zone, one of India's major trading partners is under a severe economic crisis. This has significantly affected Indian exports because of reduced demand. India recorded a Current Account deficit of 18.10 USD Billion in the first quarter of 2013, depleting its Forex reserves in the bargain and thus depreciating the rupee. India imports more than it exports and, so, it is a net buyer of the dollar. India fulfils around 80 percent of its domestic fuel needs through Imports and so far, the foreign exchange brought in by FDs in the form of dollar was helping India meet tills deficit caused by higher imports. The rising current account deficit and fiscal deficit in light of the US recovery has now made India a less assuring destination for Falls, The fall of the rupee, where it crossed 60 to a dollar is fuelled by strong US economic data. While the volatility continues, it would not be a surprise if the rupee further witnesses a sharp fall in the short- to medium-term.


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