As Rs sinks lower and lower on $ demand, what lies ahead? | business | Hindustan Times
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As Rs sinks lower and lower on $ demand, what lies ahead?

business Updated: Dec 15, 2011 22:42 IST

Why is the rupee falling against the US dollar?
The fall in the value of the rupee is driven more by external factors as sovereign debt problems in Europe and a slowdown in the US has led to search for safe heavens among investors and the US dollar is the safest bet.

Besides the rupee, other currencies have also fallen against the greenback. The euro is currently trading at an 11-month low against the US dollar.

Foreign institutional investors (FIIs) have also been pulling out dollar from the Indian market since March 2011, thereby bringing down the rupee's value. High demand for dollars in comparison to the rupee has made former costlier and led to a depreciating rupee.

How will it impact a common man's budget?

A decline in the rupee's value will make imported goods costlier. Petrol, diesel, high-end cars and bikes, foreign travel and education will become dearer.

What the RBI can do?
As volatility in the global markets is expected to continue for some time, the Reserve Bank of India (RBI), which is responsible for maintaining the official exchange rate of the rupee, may not have enough capacity to intervene in the currency market. One of the measures is to sell dollars to increase the supply but it does not have a large foreign exchange reserve. The reserve, currently around $306 billion, is sufficient to fund only three-four months of imports. Other measures aimed at attracting more funds into the country include raising interest rates on non-resident Indian deposits and liberalisation of external commercial borrowing (ECB) norms.

What the government can do?
The finance ministry may take policy actions such as raising FII investment limit in corporate and government securities to increase the supply of dollars in the country.

Who will benefit from the fall?
A falling rupee spells good news for companies who are selling their goods and services outside of India. Information technology (IT) and pharmaceutical companies will see their profit margins going up.

Who will lose?
Companies that import raw materials will see their profit margins hit since they will have to spend more rupee.

Companies in oil and gas, capital goods and automobile sectors will be adversely impacted by the rupee's depreciation.

Where will the rupee stabilise?
An end to Europe's debt problem will decide the future course of the rupee. Experts expect the rupee to decline further to 56-57 level against the US $.