The Rupee has breached new lows while the dollar continues to strengthen to Rs 54 and more. Indeed, the December quarter has already seen a drop of more than 10%, after another 10% fall in the previous quarter. But what has caused the rupee to fall?
The "Current Account" deficit
That's what you hear about. We import things. We export other things. Our beloved NRIs send money home ("remittances"). We pay interest on borrowings from abroad. If you sum these up, you get a "current account" balance which is, for India, usually negative.
From April to November 2011, India exported $192.7 billion worth of goods, while imports were $309 billion. The trade deficit is thus more than $116 billion. Adding transfer payments and software services, the "current account deficit" is about $70 billion for the first seven months of the year.
Much of the deficit is fuel — we have already imported $70 billion worth of oil this year (we import 2/3rd of what we use).
The fact that we run a current accountRead More »from Protecting the rupee by freeing it