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Depreciating Rupee: A Sign of Worry

Indian currency experienced an all time low in May-2013.  The depreciating value of the currency is a sure-shot sign that something is amiss in the economy. The trend, as experts predict, will continue for some time in spite of heavy foreign fund flows.

Indian currency is shoved down because of one prime reason, i.e. the continuous surge in gold imports. In April 2013, India imported a total gold of worth $7.5 bn. It was a sharp jump from $3.1 bn in March 2013. The total trade deficit of the country was amounting to a total of $17.8 bn in April 2013.

Know Why:

There are various reasons for the downfall of Indian currency in the international market. Some of them are listed below:

  • Dollar is Gaining more power: In reaction of an end to a loose monetary policy of the US Federal Reserve, the US Central Bank, the strength of US dollar increased worldwide. The US Central Bank proclaimed that it will continue to print money as long as it stimulated the growth of the indigenous economy. If US stopped the programme, the demand for dollars would splurge while the supply would go down. In retrospective effect, most emerging economy currencies weakened. For Indian currency, the demand from oil importers influenced the strong US dollar.
  • Huge Current Account Deficit (CAD):  the current account deficit is the difference between the outflow and inflow of foreign currency. It was at a record high 6.7% in December quarter of FY13 due to rising oil prices and imports. Usually, April and May are crucial months for country’s trade deficit. A deteriorating trade deficit is not good for the rupee as the demand for US dollar rises.  Currency is weakened by a large percentage of current account deficit.
  • RBI Bought Huge Number of US Dollars : Reserve Bank of India bought $820 million in March to stock up its reserves. 

Overall, the fall of Indian Rupee against US Dollars is because of dollar buying by RBI, P.Chidambaram’s overseas visits, weak exports, high imports and strengthening US dollar.

 

Author Box:

Kotak Securities is one of India’s leading share broking firm offering demat account services, mutual fund & IPO investing service’s along with a research division specializing in Sectoral Research and Company Specific Equity Research. We also provide you latest share market happenings to keep you updated. Express your views on their Facebook Page and Twitter Handle (@KotakSecurities) or you can also visit www.kotaksecurities.com for more information.

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