Rupee breaches 65-mark against dollar, 10 reasons why our currency is sinking
As the rupee remained in the doldrums for the sixth session today, here are 10 main reasons which experts feel are responsible for the rupee – which has depreciated as much as 16% this year – to touch new lows each passing day.business Updated: Aug 22, 2013 22:04 IST
As the rupee remained in the doldrums for the sixth session today, here are 10 main reasons which experts feel are responsible for the rupee – which has depreciated as much as 16% this year – to touch new lows each passing day:
• Widening Current Account Deficit: The widening gap between what India earns from the rest of the world and what it pays to them is pushing up demand for the dollar and other foreign currencies.
• Policy Inaction: Perception of lack of clarity on policy front is also fanning speculative demand wherein the Reserve Bank of India (RBI) on one day said it will tighten liquidity and on yet another said it will inject $1 billion into the market.
• Falling Forex Reserves: India's foreign exchange (Forex) reserves are enough to cover imports of seven month only. The forex reserves have steadily declined in the recent months, due to which the RBI can't intervene aggressively sell dollars to prop up the rupee.
• Economic Slowdown: India's gross domestic product (GDP) growth fell to a decade low of 5% in 2012-13 and 4.5% in the January-March quarter. As a result, foreign investors are losing confidence and pulling money out of the Indian markets.
• Dependence on Foreign money: India's current account deficit was financed by foreign money for the last many years. Withdrawal of money by overseas investors is leading to the weakness in the rupee.
• Recovery in the US: The slow but steady recovery in the US is making the greenback stronger against other currencies, as investors pull out money from other markets to reinvest in the US.
• Stimulus Withdrawal: Indications that the US may withdraw or ease the fiscal stimulus package could potentially tighten liquidity in global markets and put the brakes on funds for developing economies.
• Capital Controls: The decision by the Reserve Bank and the government to impose temporary restrictions on capital flows has not gone down well with the markets. It not only discourages Indian companies from investing abroad, but also foreign firms from pumping money into India.
• Trends in other markets: The rupee is also following the trend seen in the currencies of other emerging economies such as Brazil, Indonesia, Russia and South Africa. Only China has seen its currency appreciate against dollar in recent times.
• Speculative Trading: Speculative trading in the currency markets is putting further pressure on the rupee.