Rupee Plunging down against Dollar

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Reasons Impact and Remedial Click to edit Master subtitle style Measures

Shekhar Mishra

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Downfall of rupee ( in media)

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The rupee on Monday plunged below the psychological 55-level to close at all-time low of 55.04 against the dollar amid robust demand for the US currency from banks and importers.(21st May 2012 Economic Times.com)

Rupee plunges to its all-time low of 55.47 against dollar. It depreciated by 36 paise compared to its overnight close of 55.03.(23rd May 2012 Indiatoday.in) The Indian Rupee weakened further on Tuesday against the US dollar and hit an intraday high of 55.88/$. It retraced gains from the past three days to end at 55.67/$ (29th May 2012 NDTV Profit.com)

Rupee down 43 paise against dollar; sheds some early losses. The rupee resumed lower at 55.45 per dollar as against the last closing level of 54.97 per dollar at the Interbank Foreign Exchange (Forex) Market and dropped further to 55.52 per dollar on good dollar demand.However, it recovered marginally to 55.40 per dollar at 1040 hrs due to mild selling of dollars.(6th July 2012 Businesstoday.intoday.in)

INR/USD exchange rate based on RBI reference rate

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FY 2012 ESTIMATES
Imports>Exports $470bn>320bn -$150bn Trade deficit +$90bn Service Revenue -$60bn Net deficit

How the Value of Rupee is determined against another currency?

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Exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries.

Demand and Supply

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More demand, less supply,more will be the value of the currency. This is the basic principle of economics!

Reason behind the downplunge.

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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. 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 Indias rating by the credit rating agencies such as S&P and Fitch has also hit Indias image as an investment destination. 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. American money market funds are exiting Europe, hitting continental banks that fund Indian companies.

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Reason behind the downplunge.

A widening current account deficit due to insufficient export earnings: India currently runs a $180 billion trade deficit. 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. high fiscal deficit has also seriously hurt the economy and has eroded investor confidence.

The

A persistently

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Impact of rupee depreciation

Inflation graph and Fiscal deficit to scale up.

Negative impact on FII flows to Indian market.

Negative impact on Indian students and travelers abroad .

A blow to Indian Importers.

Impact on domestic consumers.

Cheerful news for Exporters.

What can RBI AND GOVERNMENT DO TO PREVENT FURTHER DOWNFALL?

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Remedial measures
Reducing

the speculative trading (Reforms in EEFC Accounts) in FCNR Accounts.

Reforms

Selling

of Forex Reseve.

Policy

reforms to improve FDI in India. Gold import (current account deficit).

Reduce

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Remedial measures
Sovereign

backed NRI Bonds.

India

Sovereign backed Bonds. banks to borrow from abroad. QFIs from Non FATF Nations to invest in India. window for oil reforms.

Allow

Allow

Dollar

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Sources and references

http://economictimes.indiatimes.com/markets/forex/rupee-depreciation-whogains-who-loses/articleshow/14348051.cms http://videos.livemint.com/2012/06/22223135/Is-rupee-depreciation-awelcom.html?atype=tp http://www.thehindu.com/opinion/editorial/article3439613.ece http://expertscolumn.com/content/causes-indian-rupees-depreciation-vs-dollar http://sushantsupriya.com/2011/12/17/causes-of-indian-rupee-depreciation-in2011/ http://www.thinkplaninvest.com/2011/09/what-is-the-reason-behind-rupee-valuedepreciation/ http://expertscolumn.com/content/wholl-fall-faster-rupee-or-government http://businesstoday.intoday.in/story/rupee-fall-against-dollar/1/18929.html http://profit.ndtv.com/News/Article/rupee-opens-weaker-against-dollar-retracesgains-305170

http://www.thehindu.com/news/national/article3446183.ece

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