Reasons for depreciation of Indian Rupee

Lower Supply of dollars

As the US economy showed signs of recovery from the subprime crisis and
the FRS announced QE tapering, there was a improvement in the
attractiveness of US bond markets. The yield of US bond increased from
below 2% to nearly 3% in 2013 which reduced the yield differentials between
US and Indian Market. As a result, a lot of capital flew out of the country.
There was a net outflow of debt and equity from the Indian markets from
June to August 2013. More of 12,000 million of US dollars were pulled back
from the country which triggered sharp depreciation.
Current Account deficit
Indias BoP statistics were deteriorating from FY2007/08 to FY2012/13. There
was an overall BoP deficit in 2011/12 which caused loss of forex reserves.
One of the main reasons behind the Indian governments inability to arrest
the fall of the national currency is the critical current account deficit. In the
2012-13 fiscal Indias CAD was measured at 4.8 per cent of the GDP. The
current account deficit rapidly increased from -15,737 million USD in 2007/08
to -88,163 milion USD in 2012/13. The government has been unable to come
up with any new destinations for exporting its products and this has also
hampered the growth in this sector.
Inflation
RBI dropped repo rate three times during the 2012-13 period in order to
control the rising inflation. WPI increased 4.5% to 7% during March to August
of 2013. Also the CPI inflation was constantly remaining above 10 percent.
CPI based inflation reduced the competitiveness of Indias exports. Due to
the inflation and the subsequent interest rate drop, the currency became less
attractive to the foreign investors and thus the rupee depreciated.
Policy Paralysis
The parliament is unable to transact any meaningful business and reforms
occupy a back seat. Coalition politics made things difficult for the
government to push the much-needed reforms in many sectors because of
pressure from alliance partners. This is creating panic among overseas
investors who want to invest in India. Also the subsidies in the food, fertilizer
and petroleum sectors widened the fiscal deficit. But the government found

it difficult to reduce these subsidies because of coalition and elections in

certain states.

Slow Economic Growth

The economy was growing slow. The GDP growth rate decreased from 6.2%
to 5% in the year 2012/13.