Why is the US dollar walking down?

– When it comes to the US being a consumer, it has one of the largest appetites in the world. To keep up its demand for consumption, its imports are huge when compared to exports. This created pressure since there were more payments in dollars than receipt of any other currency, which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. This resulted in the depreciation of the dollar’s value, which again caused more outflow of dollar for import payments. This created a state of inflation and made consumables costlier to US. To control inflation US resorted to increase in interest rates to cool down pressure on demand side of consumption. This factor along with recession in all other sectors, particularly real estate, is causing the mighty US dollar to shake. Impact of dollar fluctuations on the Indian economy Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last long because the oil price rise in the 1970s and 80s created a big gap in India’s balance of payment. Balance of payment (BOP) of any country is the balance resulting from the flow of payments/receipts between an individual country and all other countries as a result of import/exports happening between an individual country, in our case India and rest of the world. This gap widened during Iraq’s attempt to take over Kuwait. Thereafter, exports also contributed to FX reserve along with Foreign Direct Investment into the Indian economy and reduced the BOP gap Indian rupee appreciation against dollar impacted heavily to the following: 1. Exporters 2. Importers 3. Foreign investors Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the world’s largest processor of diamonds. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48, was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike. Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like – Foreign investment of up to 51% equity limit in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special

” says Abheek Barua. Chief Economist. Malakar does a ground check and forecast how the currency could behave over the year… The Indian Rupee since the past month has been rising for both domestic as well as global reasons. but a million Rupee question! Home > Business & Investment > Rupee V/S. made foreign investment in India very attractive. However. more so because it tends to impact every sector of the economy. But yes. 2012 The rupee which witnessed a step fall through end 2011. 49.5 to Rs. February 13. 54. Today it is at the cross road and all eyes are on it. the appreciation is a double edged sword. While our crude bill will certainly be assisted by the rising rupee. Barua was speaking about the . on the other. Dollar Play Rupee V/S. Dollar Play Monday.. how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. “The current rally in the Indian Rupee is being driven by a number of factors that appear to be unfolding simultaneously both from the domestic front and from a substantial shift in global risk appetite. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate Conclusively.circumstances. BPOs. is no longer a million dollar question. rupee depreciation will affect importers. recovered sharply from Rs.5 in 2012 thanks to the increased FII and capital inflows. On one hand the rupee appreciation will affect exporters. allowing free usage of export earnings to exporters. So now it depends on what the future has to reveal for. Can the Dollar remain king or not. exports would suffer. HDFC Bank. The question now is: where is it headed? How will the rupee versus dollar play affect the economy through 2012? Manik K. directly or indirectly. etc. one of the prime factors that will affect India’s rupee movements is our trade deficit and this may affect rupee appreciation. appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general.

11.recent appreciation that saw the rupee reach Rs.67 vis-à-vis the dollar in early trade on the Interbank Foreign Exchange Market on Friday. However. but importers would benefit from an appreciating currency.” explains Jayraman. Next the deregulation of the Non-Resident deposit rates helped in increasing fund flows from that source. which has impacted the stability of the rupee and also the overall sentiment of the market. 6700 crore. “Imports could surge if the currency maintains its appreciating path at a time when the domestic industry lags on competitiveness. as it reduces the cost of imports.5 only in January 2012 which is remarkable and which is directly relatable to the capital inflows” says Jayraman. Kotak Securities. Head Research. “In fact the rupee has appreciated from Rs. Jayraman. The other primary sectors that will be affected. Head. and for the equity markets too. They have also invested huge amounts in the debt market in December 2011 and January 2012. Research Associate. The Rupee appreciation would be a burden on exporters. Remember that we import approximately 75% of our crude oil requirement and this is set to increase with GDP growth. a rupee appreciation is observed to be favourable. And what specifically is the relationship of an appreciating rupee and India’s equities? FII equity investments in January 2012 alone totaled more than Rs. “Therefore the policy of the government should be to encourage investment and instill confidence on long term basis with FII’s so that they would be proactive in looking at opportunities in the Indian economy. the RBI followed up by intervening more proactively in the FX markets so as to curb imported inflation pressures subsequently pushing the USD/INR pair lower. 49. So if India’s rupee appreciates who will cheer? “Primarily a stronger rupee will help to meet the commitment in dollar terms on import bills comfortably. This decision had two downstream effects. for the entire second half between July 2011 to December 2011 FII’s have been net sellers to the tune of Rs.5 to Rs. “There is a loose relationship between the trend in the rupee and the trend in exports. Kotak Securities’ Chouhan is more sanguine.” says Chouhan. 7000 crore have come in till date. 49.” says K. “In terms of imports. However again there is a caveat.000 crore and in February 2012 more than Rs. Technical Research. mainly crude oil. First speculation in the USD/INR pair was arrested and this helped the currency pair move into its natural equilibrium range.” says Barua. Inventure Growth and Securities.” says Shrikant Chouhan. The “Appreciating rupee is an added . “After announcing the measures. To the contrary. both positively as well as negatively by the surging rupee would be exports and imports. Bonanza Portfolio. Barua notes that the initial turn of the rupee could be traced to the RBI decision to curb speculative trading in the forwards market and to de-regulate Non-resident deposit rates. 54.” says Milan Bavishi.

49. “In H1 CY12. . it is still a day dream as the outflow of foreign currencies towards commitments of the government and otherwise is ever increasing and because of the sound capital inflows we are in a position to manage the stability of the rupee. 49. Chief Economist. So a decline in the Euro could accompany a rise in the Rupee.5 levels to Rs. Strikingly the rupee recovered sharply from Rs. Decoupling is the breakdown in the correlation between two factors.” says K Jayraman-Research AssociateBonanza Portfolo. 48 to Rs. It requires a combination of factors like economic growth.” So at the end of the day is the appreciating rupee good or bad for the economy? “A moderate staggered appreciation of rupee is a good sign of growth and best environment to expect.K JayramanResearch Associate-Bonanza Portfolio. of Kotak Securities expects the rupee to trade in the Rs. . HDFC Bank. we believe is limited to Rs. Inventure Growth and Securities. owing to FII inflows/ capital inflows on fresh allocation of funds to emerging markets particularly India during this year. “On the upper band dollar prices can rise again to Rs. we could see volatility in the rupee/dollar. Head Research. A moderate strengthening of rupee against dollar over long periods is the most stable way for growth and development of our economy.” notes Jayraman.” he concludes.” notes Abheek Barua. However. 51. 51 range in the H1 2012 period. “The Euro could increasingly be driven by local factors including expansionary monetary policy and its dynamic need not reflect the global mood. moderate inflation and sound policies of government. And the downside. However. But we don’t see significant appreciation in the rupee from the current levels.” he continues.5 up to the Rs. trade deficits and proper balance of payments.5 in January 2012. In the case of India. 48. New Trends A key change that may be on the cards is the decoupling of the Euro and the Rupee. Rupee range Shrikant Chouhan. fiscal deficit being under control. 48 level in the next few weeks.” says Milan Bavishi. Currency Drivers Currency and its stability is a complex issue which is driven by demand and supply on a day to day basis.gain for FIIs. The rupee can still appreciate marginally from the current levels of Rs. “It is so sensitive that any abnormal economic activity globally or otherwise will have an immediate impact on the rupee against the dollar. if you take the H1 CY12 period the rupee can trade in a wider range depending on further capital inflows. FII flows are driven more by factors governing debt and equity markets. 54. “Certainly the Indian government is doing its best and going forward 2012 will be a year of stability in currencies in a narrow range.50.

0 – 50. how RBI trying to defend the rupee value and how it is going to affect the industries.5 – 45. 2011 Economy. Subscribe to our future articles here.What is the reason behind rupee value depreciation ? September 25.0 range. The same time last month (22-Aug-2011).0. This kind of increase would have the drastic impact on the macro economy of the country like heavy raise in the import cost where countries like India heavily depends on the importing on Oil and other crucial raw materials needs for the industries. Indian Economy The past two weeks have been disastrous for the rupee value against dollar currency. at this time of writing this article it is hovered to the range of 49. This article explores the reason behind the rupee value depreciation. also read:    Europe Debt Crisis What is Sovereign Debt problem? What is credit rating downgrade? . rupee value against dollar was 44. It is expected to raise further which would result in weakening the rupee value against the dollar currency. please post it in the comments section. I come up with this article after the readers request to understand the currency war on recent days. If you have any thoughts.

its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. but with a provision for the devaluation of a currency. when the currency will have more demand and when it will have less demand. we should have the currency of that country to pay for the trade. The above example is given to explain it in simple words. Exchange rates for such currencies are likely to change almost constantly on financial markets. As we know that. Here I am talking only about the dollar. How they would put it in our market?. the demand for a currency would come in the different way. between 1994 and 2005. mainly by banks. If a currency is free-floating. when they are pulling out of market. Here I will put it in the simple words why the currency value is often fluctuated. In the same way. It is the basic theory. Inflation and exchange rates are highly related. because of the our growing economy and industrial development. They will sell or convert to our currency and invest in India. We need to understand in the global economy terms. around the world. ¥) was pegged to the United States dollar at ¥8. A currency will tend to become more valuable when its demand is higher than supply. overseas investors would invest heavily on our market.How currency value is determined? We are not going deep dive into economic terms to understand the currency value fluctuation. We can take our real time example of stock market investment to understand the above principle. A movable or adjustable peg system is a system of fixed exchange rates. For example. When we are importing from other countries. Remember that exchange rates are expressed as a comparison of two currencies. Reserve bank change the interest rates to control the Inflation and exchange rates. the demand for the currency will be very high.2768 to $1. our stock market is dominated by the overseas investors (outside India). because it is the global currency and most of the countries trading using the dollar as trade reserve currency. demand for the rupee will be decreased and value is depreciated. . the Chinese yuan renminbi (CNY. Our rupee value will be increased against dollar. There are many factors to decide the currencies values but that could be very difficult for the common man to understand the theory. When our economy is doing well and market is performing better than other countries. The value for the currency is fluctuated on real time. A currency will tend to become less valuable when its demand is less than supply. It is clear that when more investors coming to India. It is always relative and can be measured between two countries. Interest rates.

but we are not talking about all the factors in this section. the reason said by our finance minister was the depreciation of rupee value against dollar. it is impacted based on the other conditions like inflation or economic situation. it is very difficult for the Reserve Bank of a country to adjust the value of the currency. Interest Rates o A higher interest rates offer good returns compare to other countries. This sections write down few economic conditions when the currency value will be under pressure. Note that interest rates has the close relation with interest rates. RBI would not allow currency to be higher after certain level because of the exports would get affected like IT companies would suffer if the rupee get appreciated against the dollar. the outgo of money will be much higher. But.Why RBI intervene on Currency valuation? In the last week we have seen RBI has acted to stop the erosion of rupee value against the dollar currency. a country with a consistently lower inflation rate exhibits a rising currency value. as its purchasing power increases relative to other currencies (What is Inflation?). I have explained in the simple words to make a common man understand the currency fluctuations. It will result in the foreign capital come into the country. Lower interest rates decrease the currency value. This would affect the expenses for the companies who imports raw materials for their factory and all the Oil Marketing Companies (OMC) will incur heavy payment to import the Oil. Note that.  Inflation o As a general rule. The currency value would not be affected only based on the interest. What it did was sold the dollar currency in the market to increase the value of rupee. the long term solution would be fix the problem in economy and bring the inflation into control. In the decreasing rupee scenario. Major Factors Influencing the Currency Value In the above section. Now you would have understood why the Petrol prices have been increase in the last fortnight. India is heavily depend on the import of raw materials and Oil for its industrial development. You would wonder why RBI has to intervene on currency value decrease or increase.The following are the three major factors influencing the changes in the currency values. Current Account Deficits   . If you look into the news papers. There are many other factors too.

o Basically current account of a country presents the status on the trade of a country between other trading partners. It is expected that it would continue the slide as many macro economic factors not in favor of Indian economy. In India. etc leads to search for the safe heaven among the investors. US economy problem. We are moving back to the olden days. there is mismatch between the various sources released data. Please read this article. data provided on the GDP is not correct. It is one of the best seller in the subject of the currency market.    Foreign Funds Outflow o It is the major concern of Indian economy now. Government Deficit is High o The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10 per cent of GDP. Understanding the currency basics is not as simple as reading this article. Political Uncertainty and Corruption o This is one of the major factor for any country to stabilize the economy. A country needs to manage its deficit within control. last one year we are seeing the series of corruptions and there is no good news from the ruling party (Congress) about the economic reforms and lot of agitation among the citizens including the veteran Gandhian Anna Hazare’s campaign of Fight for Second Freedom which took attention from global media. According to the real data. More demand for the foreign currency would reduce the value of that country’s currency. India needs political change to gain confidence among the investors. This situation is not good for a country because the country needs to buy more foreign currency to fulfill its need inside the country. that means country is doing more trading outside the country then its actual earning inside the country. This article provides the very basic details about the India’s situation and devaluation of rupee in the recent time. . It is expected that it will go further down in the coming days. The govt. Because of the global uncertainty and various economy crisis like Europe sovereign debt problem. It is high deficit and investors lost faith in the local economy. 57. The following are the factors which would slide down the rupee value. please read the book Currency Wars. The latest new reveals that India is in recession. They are quickly pulling out the money fro Indian market and investing in any other safe investments like Gold or US dollar. Summary Updated (29-June-2012): The rupee value against dollar is around Rs. otherwise it will lead to a economic problem. Impact of INR vs USD In the last two weeks Indian rupee has depreciated about 7% against the USA dollar value. India’s growth is in the negative trend. If there is any deficit in the current account. If you would like to understand the different currency market in the world.

. The above are the very basic idea on currency value and how it is affected. If you have any thoughts.I hope this article would have given an idea about the rupee depreciation and the reason why the currency is changed. But. there are hundreds of parameters to decide a currency value and politics also there to manipulate the own currency which China has done for a long time. please post ti in the comments section.

Sign up to vote on this title
UsefulNot useful