Indian Rupee - Why Is The Rupee Falling So Rapidly Against The Dollar (June 2013) - Quora

7/9/13
Indian Rupee: Why is the Rupee falling so rapidly against the Dollar (June 2013)? - Quora
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Comment Share (11) Report Options 23 Answers Parvathy S Lal

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Kushal Singhal, History Freak 350 votes by Souptik Sen, Amar Sandeep Ankem, Dhruv Pubby, (more) It is actually quite simple. Less the dollar in indian market, more will be its value and that means downfall of rupee because as of today you are paying 60 rupees for 1 dollar.Now, we should go into the reasons for the sameThe most important thing that India imports is crude oil we import crude oil from countries like Saudi Arabia, Iraq, Venezuela etc. and these countries dont accept the Indian Rupee for payments, they want us to pay them in an internationally accepted currency like the USD or Euro. It would have been great if these countries accepted the Indian Rupee because India can print as many Rupees as they want but India cant print the USD or the Euro, so we have to rely on other means to get US Dollars. How do we get US Dollars? There are three main ways in which India gets USD. The first one is obvious enough, when we export goods and services we get paid in USD. The second one is also fairly obvious which is investment. When foreign investors invest in India they bring in USD and thats another way to get USD. The third way which is not very apparent is remittances - NRIs sending in money to
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Question Stats Latest activity 9h ago This question has 1 monitor with 1233659 topic followers and 1 alias exists. 39790 views on this question. 176 people are following this question.
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India. What do these things tell us? These things tell us that it is absolutely essential for us to have a steady flow of USD or other big currency coming in the country in order to finance our oil bill and pay for our other imports, if we run out of foreign exchange, we will be in big trouble because without oil, nothing else will function. The measure for whether this equation is fine or not is called CAD (Current Account Deficit), which is largely the difference between exports and imports and in Indias case, the CAD is becoming higher and higher with each successive month, and this means that Indias foreign exchange reserves are diminishing. One of the big factors worsening Indias CAD are the ever increasing gold imports. The festival of Akshaya Tritiya contributed to heavy imports recently, and that in turned made the CAD even worse. If India spends USD on gold then that reduces the forex reserves for other important commodities like oil. Theoretically, if there were no gold imports then that would eliminate the burden on forex reserves, and in a way it will help the Indian economy. However, you cant eliminate gold imports completely because a lot of people depend on gold jewelry and investments for their livelihood, and India has always imported gold. So, the problem then is not so much gold imports but the great pace at which these imports have increased in recent years, and the pressure it is putting on the foreign exchange reserves, and the worsening CAD. Will stopping gold imports help the Indian economy? The answer to this question is simple no, simply stopping gold imports will not help the Indian economy because a lot of people depend on gold for their livelihood, and they need gold imports to remain in business and survive. Will slowing down gold imports help yes I believe they will help because they wouldnt be such a big drain on our forex reserves and that will be great. However, the recent rise in gold imports have been investment driven and that is largely due to the rise in gold prices, and a lack of other investment alternatives available to Indians. What we need is a better investment climate that helps people get other alternates to gold for investment, and that also helps with the other factors that I wrote about above related to bringing in foreign exchange in the country. You want a climate where exports rise (services exports declined last month), foreign investments come into the country both in the form of FDI and FII, and all that in turns help the CAD. 22+ Comments Share (3) Thank Report 26 Jun Nitesh Kumar, Final year UG student at IIT Kharagpur 94 votes by Balaji Viswanathan, Keshav Choudhary, Ujjwal Singh, (more)
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1. Dollar strength: The dollar index has been rising on signs of growing economic momentum and talk of an early end to the Fed's stimulus effort. Thio Chin Loo, senior currency strategist at BNP Paribas told NDTV that it's a general dollar rebound in markets this morning in the back of rising U.S. yields on Friday as a result of slightly better than expect payroll data in the U.S. The dollar is high across the board including the rupee, she added. 2. Widening trade deficit: Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. In case of an event shock, for example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money, leaving India scrambling for dollars. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflow. India's current account deficit was equivalent to a record 6.7 per cent of gross domestic product in December. 3. Weakness in domestic equities: Foreign institutional investors have been selling index futures in the last week. This is a hedging move as FIIs expect stocks (cash segment) to fall in the near term, traders said. FIIs have been a key support for markets (and the rupee) after buying over $15.38 billion (Rs.90,000 crore) worth of shares this year as of last week. 4. Rising import bill: Oil and gold imports account for 35 per cent and 11 per cent of India's trade bill respectively. Traders say there has been continuous demand for the greenback from oil importers, the biggest buyers of dollars in the domestic currency market, pushing the rupee lower. Similarly, falling gold prices have offset the government's and the central bank's moves to reduce gold imports, which increases current account deficit and weighs on the currency. 5. Weak economic fundamentals: Moses Harding of IndusInd Bank told NDTV that weak economy and no signs of a quick fix solution are weighing on the rupee. The UPA government is unlikely to deliver far reaching reforms to generate heavy capital inflows, as it did last September to stave off the loss of India's investment grade credit rating, experts say.
source http://profit.ndtv.com/news/chea... 3+ Comments Share (2) Thank Report 21 Jun Balaji Viswanathan, Founder, Zingfin.com 690 votes by Dhruv Hari Baldawa, Thomas Foster, Balajiganapathi Senthilnathan, (more)
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India is now at the brink of being downgraded to "junk" status. If that happens, India will be the first in the BRIC category to lose the "investment grade". A "junk" rating means that there is a high chance that India will not repay the debt it is borrowing from outsiders. That is a nasty status that will throw us back to early 1990s.
Fundamental Problem
The real problem is Indian politics. The present government is voted in by an Indian middle class that has forgotten about the importance of economic liberalization and the lessons of late 1980s. The recent euphoria has clouded our minds and have taken our eyes off the economic wheel. While the Indian political discussion is centered on some riots happened 11 years ago, the economy is slowly slipping away.
Why Now?
Only when the tide goes out do you discover who's been swimming naked. - Warren Buffett When things are normal, very few notice the fault lines. However, as investors are moving their money back to US markets, they really have a choice of pulling out from the weakest markets. Although most currencies fell against the dollar due to this phenomenon, the weaker economies were hurt the most.
Here is the reason S&P cites in its negative outlook for India. The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks
S&P: India Could Be Downgraded To Junk (July 2012) S&P: India has 1-in-3 chance of downgrade to junk (May 2013) Via Achyut Bihani. 11+ Comments Share (10) Thank Report 26 Jun Deepak Shenoy, Stocks, futures and options trader in... 25 votes by Ramanuja Suri, Apoorv Chopra, Jaichander Ramesh, (more) Here's the concept.
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1) We have a trade deficit of nearly $200 billion. Most of this is because of crude imports and gold imports. 2) We offset some of that with service exports ($50 bn) and remittances/transfers from abroad ($70 bn) 3) What is left is a big hole of around $80-$100bn. This is bridged by foreign inflows into investment - FDI and portfolio investment into stocks (FIIs). 4) In June, FIIs got spooked by the US Fed "taper" and exited both bonds and stocks, and some even converted dollars to rupees. The absence of FII inflows was enough to spook the rupee into falling. 5) India doesn't allow other countries to hold the rupee or trade with it in rupees. Therefore even if an Iran wants to keep rupees in exchange for oil, it can't. The over-dependance on inflows, without a convertible currency, is what will keep causing rupee depreciation until we get to the point where we can export more than we import. 1 Comment Share (2) Thank Report 3 Jul Sindhuja Madikanti, engineer, politics enthusiast, aspirant 18 votes by Akash Dhotre, Ujjwal Singh, Amar Sandeep Ankem, (more) The latest reason for the free fall of Indian Rupee is the sudden withdrawal of FIIs(Foreign Institutional Investment) from India creating demand for US dollar and hence depreciation of Indian rupee. US Fed Reserve made an announcement hinting at tapering off the fiscal stimulus program ( Quantitative Easing ). This has two implications. First, the Indian rupee would depreciate further in the near future due to strengthening of US dollar. Second, the interest rates in US would soon go up yielding good dividends and so, investors are heading back to invest in US. Now coming to the problems of Indian economy that have been fuelling the rupee depreciation. High Current Account Deficit : Due to ever increasing imports, especially oil and gold, there is increasing demand for dollar and hence trigerring the downfall of rupee. The imports have been increasing, setting the vicious cycle - that is, the more the
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imports increase(vis-a-vis exports ), the more would Indian rupee depreciate. Less FDI Inflow : Due to politically unstable conditions and high fiscal deficit, there is less FDI inflow and thus contributing to the depreciation of rupee. Hence the need of the hour is structural economic reforms to strengthen the Indian economy and to rein in the subsidies to reduce fiscal deficit. Only this would contain the negative market sentiment and there would be stability in exchange rate. Comment Share Thank Report 22 Jun Pratik Mandrekar 10 votes by Nishant Chemburkar, Haribabu Thilakar, Vartika Singh, (more) While the Indian economy is not doing great, it does not correlate directly to the fall in the rupee.
Just to visualize what is happening take a look at the below currencies from all over the world and you can notice that most of them are at their 52 week or year low compared to the US dollar. Lets start with Asia , apart from China and Hong Kong, everyone is close to their 52 week right extreme.
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To be followed by the Middle East. Except for the UAE, the rest aren't doing great.
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Closer to the USA, the other countries in America are faring bad too.
Only Europe seems to be on some kind of middle ground which can also explain the weakening of the India Rupee against the British Pound/Euro.
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So yes, it is all about relativity. Note - Currency data are screen representations from http://money.cnn.com Comment Share (1) Thank Report 29 Jun
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