Basics explained: Why does the Rupee fall?

The rupee has been making headlines the past few months after it dropped to its lifetime-low of 68-to-a-dollar levels. Jokes were being forwarded that the rupee has retired.

The valuation of a currency is important, especially in an import-dependent country like India. It is always fixed against another currency and follows the basic demand-supply-price dynamics. Higher the demand, greater the value.

In such a case, to understand the rupee’s fall, one needs to identify stress factors that hamper demand.
Here are some:

1) Sentiment: A big part of trading is sentiment. This is nothing but investors’ expectation about the future prospects. A dampening of sentiment, thus, causes traders to sell and leads to a fall in the valuation.
India’s economy has grown at the slowest pace in a decade.

Growth in the economy has fallen from a peak of 9% to sub-5% levels. And this slowdown is expected to continue. In contrast, investors are happy with the recovery in the US economy. Hence, the preference for dollars over the rupee.

2) Speculation: Traders try to guess the rupee’s value over a certain period of time on the basis of various factors. This is called speculation. This is done so by betting using currency futures – a derivative instrument. Speculation affects the underlying value of the rupee.

3) Current account deficit: Current account deficit (CAD) is when a country’s payments to other nations exceed the amount it receives. This is predominantly led by a huge import bill. Since the payments are in foreign currency, it means sale of rupees. Higher selling leads to a fall in value. In the last five years, India’s current account deficit has risen more than 10-fold.

Related Video



4) Fiscal deficit: Fiscal deficit is when the government spends more than it earns. This means high debt. Fiscal deficit and CAD are together called ‘twin deficits’, which the government is frantically trying to curb. While developing countries are expected to have a higher deficits, too much debt increases risks.

5) Monetary policy: The Reserve Bank of India (RBI) regularly monitors India’s monetary policy by deciding lending rates and regulating the banking sector. This indirectly affects corporates, the economic growth, and thus, the valuation of the rupee.

The RBI’s first priority is to tackle high inflation. For this purpose, we have had a high interest rate regime for the past few years. In contrast, the US has had near-zero rates since the 2008 crisis to fuel demand and growth.

The RBI also regularly intervenes in the foreign exchange market to curb fluctuations. It sells dollars from its forex reserves. This is a temporary measure to halt the slide of the rupee by creating artificial demand.

Slideshow - Most traded currencies in the world
This currency is among the world’s dominant reserve currencies and is most used in international transactions. Abbreviated as US$, United States dollar is the official currency of the United States ... more 
This currency is among the world’s dominant reserve currencies and is most used in international transactions. Abbreviated as US$, United States dollar is the official currency of the United States of America. It is divided into 100 smaller units called cents and Greenback is the nickname of the currency.

(Photo: ThinkStock)

less 
1 / 15
Yahoo Finance India
Fri 21 Dec, 2012 9:30 AM IST


6) Inflation: India has battled high inflation for many years. Retail inflation, measured by the CPI, has hovered in double digits. This hampers everything – from individual budgets to industry and economy. For this reason, investors prefer to buy the currency of a country with lower inflation. In the US, inflation is barely 2%. Another reason for the dollar-rush.

7) Economic growth: The economy is measured by the Gross Domestic Product (GDP). A growth in GDP signifies expansion. Higher the growth, greater the value of an economy, and consequently more demand for its currency. India’s GDP growth forecast has been downgraded by analysts worldwide from over 6%-levels to 5%-levels.

This work is produced by Simplus Information Services Pvt Ltd. Customer engagement through content.

 Like this article? Click here for more articles from the same provider.

Latest News

  • Most economists say Brexit will harm economy - poll
    Most economists say Brexit will harm economy - poll

    Nine out of 10 of Britain's top economists working in London's City financial district, small business and academia believe the economy will be harmed if Britain leaves the European Union, a poll said on Sunday. The poll, which the Observer newspaper said was the biggest of its kind drawing responses from more than 600 economists, is a boost for Prime Minister David Cameron, who is leading the campaign for Britain to stay in the 28-member bloc at a referendum on June 23 despite opposition from …

  • Coal India net profit up marginally in Q4

    Kolkata, May 29 (IANS) Coal India Ltd. (CIL) on Sunday reported a marginal rise of 0.22 percent in its consolidated net profit at Rs. 4,247.93 crore for the fourth quarter that ended on March 31 as compared to Rs.4,238.55 crore in the year before. The revision is applicable to all its subsidiaries for regulated and non-regulated sectors, the CIL said on Sunday. "Due to this revision, CIL will earn approx. additional revenue of Rs.3,234 crore for the balance period of financial year 2016-17," …

  • Key macro-economic data to guide the equity markets

    Mumbai, May 29 (IANS) Key macro-economic data, along with the next batch of quarterly results and trends in global markets, are expected to guide the Indian equity indices during the upcoming week. Further, cues on future direction of key lending rates in India and the US will have a major bearing on investors' sentiments. "Next week should greet the markets with a slew of economic data, including PMI (purchasing managers index), eight core activity, fiscal deficit and GDP (gross domestic …

  • Lufthansa suspends Caracas flights as Venezuelan economy struggles
    Lufthansa suspends Caracas flights as Venezuelan economy struggles

    German airline Deutsche Lufthansa AG (LHAG.DE) said on Saturday it will temporarily suspend flights to Venezuela as of next month due to economic difficulties in the South American nation and problems converting local currency into dollars. "We deeply regret that for these reasons, we will be forced to suspend our service between Caracas and Frankfurt as of June 18," the company wrote in a statement, noting that demand for international flights to Caracas dropped in 2015 and the first quarter …

  • Sun Pharma gets U.S. subpoena over generic drugs pricing
    Sun Pharma gets U.S. subpoena over generic drugs pricing

    The U.S. Department of Justice (DoJ) has subpoenaed India's largest drugmaker Sun Pharmaceutical Industries Ltd seeking information about the pricing and marketing of the generic drugs it sells in the United States, the company said on Saturday. The DoJ's antitrust division has also asked Sun Pharma's U.S. unit for documents related to employee and corporate records and communications with competitors. The subpoena comes amid a wider probe by U.S. regulators into steep increases in the prices …

  • Yellen says Fed rate hike likely appropriate in coming months

    The Federal Reserve should raise interest rates "in the coming months" if the economy picks up as expected and jobs continue to be generated, U.S. central bank chief Janet Yellen said on Friday, bolstering the case for a rate increase in June or July. "It's appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen said during an appearance at Harvard University. Although …

  • Hindalco Industries's Q4 net profit up by over 123 percent

    Mumbai, May 28 (IANS) Aluminium manufacturer Hindalco Industries on Saturday reported a 123.36 percent increase in its standalone net profit for the fourth quarter of 2015-16. The company's Q4 net profit ... …

  • Global cues, results, rains catapult equity markets

    Mumbai, May 28 (IANS) Positive global cues, combined with a fresh influx of foreign funds and healthy fourth quarter results, catapulted the Indian equity markets to their highest weekly close in the last three months. Further, expectations of above-average monsoon rains, a rise in global crude oil and high-grade copper prices unleashed a relentless buying spree. Consequently, the wider 51-scrip Nifty of the National Stock Exchange (NSE) rose by 406.95 points or 5.25 percent to 8,156.65 …

DON'T MISS

  • The Rs 80,000 crore milk business is on a tear

    If you thought that all the action in business was concentrated around the e-commerce sector, you could not be more wrong. The unlikely category of milk and dairy products has been seeing some of the most ... …

  • Charged up

    Reliance Jio's battle with other cellular operators over spectrum usage charges is set to escalate. …

  • Cracking the Code

    HackerRank is helping companies recruit coding champions through online tests. …

  • Poor Prediction

    A Niti Aayog presentation says poverty in India could be wiped out by 2032. Is it possible? …

  • Missing in Action

    Villages adopted by Gandhis make little progress. …

  • The VillageEconomy

    Inside: Model villages 68 / How India failed its poor 76 …

  • Hardly Adarsh

    Saansad Adarsh Gram Yojana, PM's pet project, has the potential to kick-start the rural economy, but is going nowhere if we go by the results so far. …

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    195.55+11.80+6.42%
    SBIN.BO
    16.20+0.85+5.54%
    SUZLON.BO
    66.50-1.45-2.13%
    SPICEJET.BO
    103.35+4.55+4.61%
    IBREALEST.BO
    49.00+1.35+2.83%
    RCOM.BO
  • Price % Gainers
    Price % Gainers
    NamePriceChange% Chg
    100.90+16.75+19.90%
    CHEMFALKAL.BO
    72.90+12.10+19.90%
    SAMPRE.BO
    99.50+16.50+19.88%
    ICNX100.BO
    36.85+5.60+17.92%
    BRAHMINFRA.BO
    129.15+19.15+17.41%
    TEJNAKSH.BO
  • Price % Losers
    Price % Losers
    NamePriceChange% Chg
    8.38-1.86-18.16%
    LAHOTIOV.BO
    629.15-124.65-16.54%
    LOYALTEX.BO
    78.95-13.20-14.32%
    AMARJOTHI.BO
    13.90-2.10-13.13%
    SRSFIN.BO
    724.80-103.05-12.45%
    NOVARTIND.BO

QUOTES

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

Yahoo Cricket