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This presentation explains the recent depreciation of rupee against dollar, in the backdrop of European Debt Crisis and India’s domestic woes. It also reflects on the possible solutions to this dramatic fall and its impact on us.

Depreciating Rupee / Fall of the rupee

This article in TOI points out another important reason for depreciating Rupee; incompetent governance.


The rupee closed at an all-time low of 57.16 against the dollar on 22/06/2012. Analysts expect it to hit 58.
Why is the rupee falling despite macroeconomic fundamentals remaining steady?
The present weakening of the rupee is linked to a risk-averse sentiment. Importers are buying ahead of their requirement in the fear that the rupee could fall further. This is largely because of global factors with the dollar index near its all-time high; Moody’s downgrading global banks and Eurozone showing no signs of resolving. Investors are also disappointed that the US Fed has not announced a fresh round of monetary easing.

When will the rupee steady?
To a certain extent the fall already has a self-corrective element built in. Dealers say that all it needs is one positive development in the global markets to compel exporters to start booking profits. Such a turnaround could push the rupee back to 54-55 levels soon. Since every day the rupee sees a new fall, technically there are no new resistance levels. However, dealers feel that exporters and importers would review their position once the rupee hits 58.
How does the fall impact the economy?
As far as fuel costs are concerned, the recent depreciation in the rupee has been almost entirely offset by the fall in global oil prices, which constitutes nearly a third of the import. While in the short term the fall will add to inflationary pressures, in the medium term it will help in rebalancing the trade account by curbing imports and boosting exports.
Which businesses lose and which ones benefit?
Besides oil, the other large import items are gold, coal, diamonds and copper. The increase in price of coal will adversely impact the power and steel industry and push up prices for consumers. Auto and electronics industry with high import content will also be hit as the slowdown has reduced their ability to pass on cost increases. Businesses that benefit include IT, textiles, and engineering goods.