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)

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

  • Satya Nadella to visit Hyderabad next month

    Hyderabad, Nov 28 (IANS) Microsoft Corporation CEO Satya Nadella will visit his home town Hyderabad next month, an official said on Saturday. A Telangana government official told IANS that Nadella will ... …

  • Indian drugmaker Biocon's revenue could hit $1 bln in 4 years - MD
    Indian drugmaker Biocon's revenue could hit $1 bln in 4 years - MD

    India's biggest biotech firm Biocon Ltd expects revenue to double to $1 billion in four years as it expands in Europe and the United States with new products, its chairperson and managing director said on Saturday. In a tie-up with U.S. generic drugmaker Mylan NV, the Bengaluru-based biopharmaceutical firm has five biosimilar products - almost identical copies of original drugs - entering global regulatory approval stage which is expected to take about 18-20 months. “We forecast that by …

  • Railways to sign two JV deals for loco production

    Electric Locomotive Factory at Madhepura and Diesel Locomotive Factory at Marhowra - are worth Rs.40,000 crore. Earlier this month, Indian Railways was awarded letters of acceptance for setting up these two modern locomotive factories. While the contract for the Marhowra factory has been awarded to US' GE Global Sourcing India, the contract for Madhepura has been awarded to France's Alstom Manufacturing India. …

  • Air India might start Delhi-Washington flight: Minister

    New Delhi, Nov 28 (IANS) In a bid to expand its international operations, national passenger carrier Air India might start a direct flight between New Delhi and Washington DC. This was announced by Civil Aviation Minister Ashok Gajapathi Raju on the sidelines of an event to mark the launch of Air India's direct flight connecting New Delhi to San Francisco held on Friday evening. "Air India is actively pursuant to connect more Indian cities to the US," Raju told reporters. …

  • Bengal sets up Sixth Pay Commission

    The decision comes eight days after the central government constitutes the Sixth Pay Commission for its staffers and other employees. With the state employees lagging far behind their central counterparts in the dearness allowance component of their salary, there was much pressure on the West Bengal government to set up the commission. Indian Statistical Institute professor Abhirup Sarkar, who is a noted economist, would head the pay panel, official sources said. …

  • Rationalisation of tax exemptions, rebates to reduce litigation: Sinha

    New Delhi, Nov 28 (IANS) The central government is planning to rationalise tax rebates and exemptions to industry so as to make the taxation structure non-adverserial and rent seeking, union Minister of State for Finance Jayant Sinha said on Friday. Speaking at the 110th annual session of PHD Chamber of Commerce and Industry here, he said the government's proposal to do away with some tax exemptions and rebates is targeted to reduce litigation and discretion. Expressing his hope that the …

  • Chai over GST passage boosts equity markets

    Mumbai, Nov 28 (IANS) Political brinkmanship to get a key economic legislation passed in the ongoing winter session of parliament buoyed the Indian equity markets during the just concluded weekly trade session. Though short-coverings triggered by derivatives expiry and increased chances of a stimulus in European Union (EU) played a part in boosting the equity markets, it was the ongoing political soap opera that had investors' hooked. The barometer 30-scrip sensitive index (S&P Sensex) of the …

  • India's civil aviation security meets ICAO standards: Government

    New Delhi, Nov 28 (IANS) The central government on Saturday said that the national civil aviation security agency has fully implemented the security norms prescribed by the United Nations oversight body. has fully met the targets set by the International Civil Aviation Organisation (ICAO). The ministry informed that a ICAO team conducted an audit of Indian civil aviation security and security at Delhi airport in October, 2015 across nine audit areas. …


  • IIM Ahmedabad is the best B-school in 2015

    The 54-year-old institute is not only drawing on its traditional strengths, but is also taking wings to meet the demands of the emerging new world of business. …

  • Change is only constant at these four B-schools

    It is the best of times for B-school students. And if they happen to be at the top four schools after IIM-Ahmedabad - IIM Calcutta, XLRI, SP Jain Institute of Management & Research and MDI- it is certainly ... …

  • India's best management schools for 2015

    The eagerly-awaited issue of Business Today is here. Find out which B-school has topped the list this time. …

  • Built To Last

    Six lesser-known infrastructure companies have prospered despite adverse economic circumstances. …

  • Sweeten your e-Deals

    Shopping online this festive season can be fun if you read the fine print carefully. …

  • Exercise Caution

    The IPO market is buoyant with a healthy line-up of issues, but investors should be cautious. …

  • No Headline

    Six lesser-known infrastructure companies have prospered despite adverse economic circumstances. …


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • Price % Gainers
    Price % Gainers
    NamePriceChange% Chg
  • Price % Losers
    Price % Losers
    NamePriceChange% Chg


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.
to view quotes in your portfolios.

Yahoo Cricket