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WIKI ANALYSIS
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This article describes a currency traded on the global foreign exchange market. View articles referencing this currency. |
This article discusses the Indian Rupee. For other Rupee currencies, see Rupee (disambiguation).
The chart at left shows the USD/INR currency pair; the number of Indian Rupee equivalent to 1 U.S. Dollar (USD).
Why the rupee is falling against the dollar?
The bankruptcy, sale, restructuring and merger of some of the world's largest financial institutions has caused cataclysmic disruptions in the international stocks and money markets. Analysts have described the events of the last few days as the worst financial crisis ever to have hit the world. Imprudent financial decisions, fed by greed and bad luck, have seen global financial markets collapse.
Did India do anything to save its ass? The global crises saw Indian stock markets crash, but as soon as the USA funneled in $700 billion into the American economy to revive dying markets, India too saw some stability. But the forex market had other plans!
Even as the dollar strengthened, the Indian rupee began to fall alarmingly. The Indian currency has lost almost 18 per cent against the US currency! At a low of 46.99 to the dollar this year that it hit on September 16, while the rupee was trading at 39.40 to the dollar in January this year.
So why is the rupee falling against the dollar, when the global financial crisis should impact the United States the most?
Reasons
- The American sub-prime crisis that shook the global financial markets has seen unprecedented bailouts and infusion of dollars into the US economy at a cost of many an emerging market, from where funds have been pulled out to plough back into America. India has been one of the worst hit countries on this count, as foreign funds took flight, thereby making dollars scarce and sold more Indian shares than they bought to the tune of over $9 billion.
- The growing Indian trade deficit and the large fiscal deficit are also contributing to the fall of the rupee. The higher price of imported goods, especially oil that is now ruling at over $107 per barrel, has also led to an increase in domestic inflation and a fall in the value of the Indian currency forcing RBI to raise interest rates. The demand-supply balance and the fundamentals are against the rupee too. Also, the decline in the value of the rupee has coincided with RBI discontinuing its direct sales of dollars to oil firms in early July.
- One more reason for the fall of the rupee, is the overseas non-deliverable forward (NDF) market that is not sanctioned by the RBI. An NDF is a non-deliverable forward contract where financial institutions buy forward dollars (that is, they book dollars now for delivery at a predetermined future date) in the Indian market and at the same time sell a similar amount of dollars in an overseas market -- or vice-versa
Implications of a falling Rupee
- Foreign investors will want bigger returns for their money to compensate for the higher risk. This means that the Indian government, companies and individuals will have to pay more for the money they borrow: in other words, higher interest rates.
- It will increase the Indian government's burden of repaying and servicing foreign debt.
- Discourage FII's from pouring funds into the Indian markets.
Indian corporates which could borrow from the overseas markets at cheaper rates to finance their expansion plans will be badly affected.
Solution
- RBI can sell dollars in the open market to bring down the value of the US greenback, albeit slightly.
- Monetary Policy to defend the rupee's value. Short-term interest rates changes do impact the value of the rupee against other currencies. But, the RBI has mostly used the policy to stabilise internal conditions, like steps to control rising inflation.
- However, if the Indian stock markets boom -- like they did in the last couple of years it could provide a shot in the arm for more global funds to invest in India thereby strengthening the rupee as the demand for the dollar in the local markets drops
Why the rupee is rising against the pound and euro?
Is it only because GBP and Euro are generally trading weak against all the currencies or is it a more profound impact of Balance of Payment with the Euro area?
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