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Reasons for the Rupee Depreciation

The Indian rupee has continued its free fall against the dollar, falling by over 26 per cent in the past year.  Rupee has hit a record closing low of 57.11 to a dollar on 22-June-2012.

                                        The value of a particular currency, as compared to the Dollar, falls when the relative demand for Dollar increases and the demand for this currency relatively falls. Thus, the value of Rupee decreases when the demand for Rupee falls and the demand for Dollar increases. This is known as Rupee Depreciation. The reverse phenomenon is known as Rupee Appreciation, where the relative demand for Rupee increases as compared to the Dollar.

Some of the reasons for the recent fall in the value of Rupee are:

1. Rising dollar demand by oil companies – Oil companies need $400 million a day. Ever-growing demand for gold imports has also severely hurt the rupee.
2. Foreign institutional investors shying away from India – June FII inflows fell to Rs 2,176 crore. The FIIs have been moving away from the emerging economies in the recent times. The recent downgrading of India’s rating by the credit rating agencies such as S&P and Fitch has also hit India’s image as an investment destination.
3. Strengthening of Dollar: The Euro-Zone crisis has weakened the Euro significantly against the US Dollar. In other words dollar is getting stronger in the world markets. Obviously the investors are considering US as safe place to invest in.
4. American money market funds are exiting Europe, hitting continental banks that fund Indian companies.
5. A widening current account deficit due to insufficient export earnings: India currently runs a $180 billion trade deficit.
6. The high rate of inflation erodes the value of rupee and thus calls for continuous downward adjustment against the dollar for maintaining the proper parity value.
7. A persistently high fiscal deficit has also seriously hurt the economy and has eroded investor confidence.