What is Causing Down Fall of Rupee?

Reasons why the rupee hit record low against the dollar

1. Fundamental law of economics

If the demand for the dollar in India is more than its supply, the dollar appreciates and the rupee depreciates. Demand for dollars may be created by importers requiring more dollars to pay for their imports or by Foreign Institutional Investors (FII’s) withdrawing their investments and taking the dollars outside India, thus creating a shortage of dollar supply, which, in turn, can also increase the demand for the dollar.

Similarly, when the supply of dollars in India increases with respect to its demand, the value of the dollar decreases in terms of rupees. Supply can be created by exporters bringing in more dollars from their revenues or FIIs bringing more dollars in India to spur their investments.

2. Price of crude

The price of crude puts tremendous stress on the Indian Rupee. India has to import a bulk of her oil requirements to satisfy local demand, which is rising year-on-year. Globally, the price of oil is quoted in dollars. Therefore, as the domestic demand for oil increases or the price of oil increases in the international market, the demand for dollars also increases to pay our suppliers from whom we import oil. This increase in demand for the dollar (see earlier point) weakens the rupee further.

3.Rising Import bill

Rising import bill (arising out of gold) is also a major factor that has curtailed government’s effort to tackle the fall of rupee. Gold contributes to over 10 percent of the total import bill. Gold imports were 141 tonnes in April and rose to 162 tonnes in May. Due to certain government measures gold imports declined significantly to 31 tonnes in June but could not be held for the month of July. For the first 25 days of July, the imports stood at 45 tonnes.

4.Insufficient FDI inflows

Despite all the decisions to allow major reforms in India, the government has failed to tap major FDI inflow in the country. Instead, India has witnessed withdrawal of major projects by global giants like ArcelorMittal and Posco. Posco pulled out of its Rs 30,000 crore steel plant project in Karnataka followed by ArcelorMittal that scrapped its USD 12 billion (Rs 50,000 crore) steel plant project which it was planning to set up in Odisha. Inordinate delays, land acquisition problems, government clearance delays, lack of promptness have all contributed to the withdrawal of major companies. Last year Indian companies spent more overseas than Foreign Investors in India.

5. Current Account Deficit

A current account deficit occurs when a country’s total import exceeds the total exports. This makes the country, a net debtor to the rest of the world. This is not good for the country because, the country needs to buy more foreign currency. More demand for the foreign currency will cut the value of that country’s currency. India’s current account deficit now is more than the projected level and this also contributes to the depreciation of the Indian rupee.

6. Dollar gaining strength against the other currencies

The central banks of Eurozone and Japan are printing excessive money due to which their currency is devalued. On the other hand, the US Federal Reserve has shown signs to end their stimulus making the dollar stronger against the other currencies including the Indian rupee, at least in the short term.

 In the year to date US dollar index strengthened by 1.91 percent. The strengthening of dollar is beyond government’s control which is ultimately hammering the Indian currency. Gradual recovery in US economy coupled with rising expectations that Federal Reserve will withdraw its stimulus package soon is underpinning the US dollar index.

7. Political paralysis A major reason for Rupee Depreciation

The parliament is unable to transact any meaningful business and reforms occupy a back seat. Coalition politics make things difficult for the government to push the much-needed reforms in many sectors. This is creating panic among overseas investors who want to invest in India.

8. Volatile equity market

Our equity market has been volatile for some time now. So, the FII’s are in a dilemma whether to invest in India or not. Even though they have brought in record inflows to the country in this year, if they pull out, it will result in a decrease of inflow of dollars into the country. Therefore, the decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.

The widening current account deficit and the depreciating rupee are definitely cause for concern. A weaker rupee further erodes the returns earned by the foreign investors in the Indian market. FIIs have turned net sellers of debt securities here for the first time in 13 months. Again, the June sell-off is attributed to the weakness in the Indian currency as the rising cost of hedging a volatile rupee hurts the yield differential that FIIs work with.