Dollar in India

What are the reasons for the rupee falling against the dollar? What is the impact of falling rupee on inflation in India?

The main reason for the pity condition of Indian currency is the mammoth 'Trade deficit' (India's trade deficit: $190 bn) that India has. Such a large trade deficit inadvertently increases the demand of dollar by Indian buyers and consequent selling of the rupee. This creates a pressure on the Indian Rupee.While this holds true even in normal conditions but during crisis situations, traders start dumping the Rupee due to nervousness as they fear the flow of capital from Country (which further increases the selling of Rupee).
The reason for such a large Trade deficit in India can be further attributed to two things:

(i) Crude Oil and Gold Import: The energy and gold hungry India imports around 220 billion dollars of Crude oil and gold annually which comes around 75% of our total exports. Add to that other major imports in other sectors and the imports reach to 170% of exports. But why do we need to import so much crude oil and gold?

Crude oil- India has till date not been able to make a major breakthrough in finding oil and gas except for a very old discovery in 'Mumbai High', KG basin discovery by Reliance and the one by Cairn in Rajasthan. Except for these all other discoveries have been very small. So, the country is vastly unexplored in terms of natural resources. Companies want to invest but there is no cheap financing available, the risks are too high to make a commercial discovery and on top of that you get a government which weeds out even the slightest incentive to invest by providing a very unstable and investor unfriendly policy environment.

Gold- Indian government, for some reasons, loves to keep the inflation consistently too high and believes in taking no step to bring it down. Now, people forced to live in such inflationary environment need to park their money somewhere which can protect them from inflation, and here comes the gold to their rescue!!! On top of that, Gold has always been a darling of Black money. So, as the corruption is rising in India (hidden from nobody), the demand for gold is also soaring at an exponential rate fueling the gold imports (as India' gold production is almost negligible in comparison to demand in the country).

(ii) Very small manufacturing base: India has always been notorious for having a very low quality of infrastructure, erratic power supply, unstable policy environment and high cost of borrowing. All these factors add up to Investors placing India at the lowest priority order for setting up a manufacturing base. So, low manufacturing means most of the demand is met up by imports in majority of the sectors, major one being electronics and semiconductors, fertilizers, power plant equipment and almost all the big ticket items and products. Now logically as the currency weakens it should benefit the exports from country and more investors should have come forward to set-up a manufacturing base in India for domestic consumption and the exports from the country. But due to structural problems, exports have stagnated and the cost of imports is rising at the same time as the currency devaluates. So, what (currency depreciation) could have been a gain of India, has actually become a headache due to investor unfriendly environment.

Until and unless India is able to solve above two problems, it is impossible to lower trade deficit which would in turn continue to take the Rupee lower.

If I would like to make this as simple as possible I would say that this fall of rupee against dollar is because the inflow of dollar is less and hence its value is strong. Basically the strength of a country's currency depends on the economic conditions.

High salaries and a better standard of liing index would mean people spending and investing a lot overseas. This leads to an increase in imported goods thus devalueing country's own currency.

To fight against these problems various steps were taken in the last few months. Like, RBI putting a limit to the amount an Indian citizen can invest overseas. Government increased the tax on the import of gold to narrow the current account deficit. So you see how all these things are inter-related.

My basic idea to write this answer is to make the readers understand something complex in a very easy manner. To start off, there are various reasons why the rupee is falling against dollar.

India is importing more resource in comparison to the exports of goods it is doing.
Thus the inflow of foreign money is less and the outflow of rupee is more.This, reduces the value of rupee.

Difference in rates of interest:
What happens is the rates for NRI's rupee account are different from the local accounts. This leads to a dis-interest in the NRI's to invest more here in India. So lately, RBI has changed the rates for NRI's rupee ccount so that there is more fund inflows thus strengthening rupee.

Inflation: Exchange rates depend a lot on the inflation in a country. Given that the present turmoil in India, high inflation has led to a decrease in investment.

One solution a friend of mine suggested was why not print more money and ease the stress. WOW!! What an idea Sirjii!!
I know many people are not clear with this concept...so...i will explain...Money is printed by the government. Now, if the goverment thinks that they print a lot of money and on the other hand the economic development is not in pace with that...what happens is what happened to Zimbabwe....
Take the situation this way..( I read it in an article)
There is a farmer. He has a water tank to provide water to his field. He decides he will have one more field and adds another water tank. But there is no rainfall that season. So he is left with two fields but water just enough for one. Another Scenario....The farmer knows its going to rain this season and adds 2nd water tank and a field also. Finally he has water enough for both fields. If tank is the currency..the water in it is the power of the country to purchase goods. Increase in rainfall is like growth of the country. So you see that merely adding water tanks(printing money) doesnt solve the problem. You need to have dequate water to suppy. Means you must have enough economic growth. I hope this will make things clearer.

Oil Prices: India is highly dependent on Gulf countries for its oil demands. Now the oil import rates have been increasing and thus again the rupee value is falling.
What else??
Other factors affecting value of rupee were mostly the drop in Europe and unstable stock markets.

What to do now??

Now you cant stop buying oil..not practical...what can be done is to stop investing overseas for sometime...maybe use Indian products if possible.
What else...Exporters can convert a part of their earnings to rupees. Also foreign payments can be delayed. I cant think of anything more and hope article must have cleared all your doubts.

First of all its not just Indian Rupee that has taken a fall off the cliff but all the global currencies are dealing with same depreciation although in an attenuated form. Here are a few factors whose repercussion on Indian Rupee has led to its depreciation.

HIGH CAD

Digging deep into our present economic condition will give a clear idea that we have a high Current Account Deficit. Let's face it a depreciating currency is the obvious result and quick solution to tackle the CAD problem. As this would increase our exports and reduce the imports as imported goods will cost more.

Withdrawal of US Quantitative Easing scheme

After the 2008 financial crises and subsequent recession the fed decided to begin QE where they cut short the interest rates to near zero and started buying back bonds to infuse liquidity providing the banks an incentive to lend more and for the investors to shift from secure government bonds to stocks which would certainly have a greater return on investment than bonds. Now since the US has revived its economy and recovered from recession the fed is planning to end QE which has created a fuss in the market and investors are pulling out their money from developing markets which has lead to large outflows of funds from Indian markets and subsequently led to the rupee depreciation.

Less liberal FDI rules

The panacea for the problem is large capital inflows that will stay in for a longterm. The only way to achieve the aforementioned is by providing incentives to foreign investors to invest in India. The present regulations governing FDI in retail are actually driving curious investors away from India. The foreign investors have been irksome to the cumbersome and laborious process they have to undergo to invest in our country. As a combined result of above factors capital inflow into India has allayed in the recent past hence resulting in a depreciated currency.


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