The laws of macro economics are not difficult to understand. Basic fundamentals always affect the rise or fall of economies of most countries. India is no different. As a democratic country that is part of the World Trade Organisation, the Indian economy is quite similar to other world economies as far as fundamentals are concerned.
The rupee fell past 65 to the dollar to a record low on Thursday, plunging as much as 2.2 per cent to hit 65.56, and ended in the red for the sixth straight session. The rupee has fallen by 4.77 per cent in the last five trading sessions. Here are 10 main reasons that experts say are responsible for the Indian rupee — which has depreciated as much as 16 per cent this year — to touch new lows each passing day:
Reason 1 – Widening current account deficit
A ‘Current Account Deficit’ occurs when a country’s total imports of goods, services and transfers is greater than the country’s total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.
For India, this is resulting in creating more actual as well as speculative demand for the dollar and other convertible currencies.
Reason 2 – Policy inaction
Fiscal policies of the central banks of all countries including India are closely monitored by investors. Perception of lack of clarity on the policy front is also fanning speculative demand wherein the Reserve Bank of India (RBI) on one day said it will tighten liquidity and on yet another said it will inject $1 billion in the market.
Reason 3 – Low forex reserves
India’s foreign exchange reserves are enough to cover imports of only seven months. The forex reserves have declined in the recent months. Due to low reserves, the RBI can’t intervene aggressively in the currency markets.
Reason 4 – Growth slowdown
India’s gross domestic product (GDP) growth fell to a decade low of 5 per cent in 2012-13. The situation is unlikely to improve much this year. Foreign investors are pulling money out of the Indian markets due to slow growth.
Reason 5 – Dependence on foreign money
India’s current account deficit was financed by foreign money for the last many years. Withdrawal of money by overseas investors is leading to the weakness in the rupee.
Reason 6 – Recovery in the US
The slow but steady recovery in the US is making the greenback stronger against other currencies.
Reason 7 – Stimulus withdrawal
Indications that the US may withdraw or ease the fiscal stimulus package could potentially put the brakes on funds for developing economies.
Reason 8 – Capital controls
The decision by the Reserve Bank and the government to impose temporary restrictions on capital flows has not gone down well with the markets, as it will not only discourage Indian companies from investing abroad, but also foreign firms from pumping money into India.
Reason 9 – Trends in other markets
The rupee is also following the trend seen in the currencies of other emerging economies such as Brazil, Indonesia, Russia and South Africa.
Reason 10 – Speculative trading
Speculative trading in the currency markets is putting further pressure on the Indian rupee.