REASONS FOR RUPEE BEING AMONG WEAKEST CURRENCIES

Indian Rupee is one of the weakest currencies in Asia and other emerging markets. In this post I will be discussing few reasons for this:

1. India imports more that exports: In March 2012, Indian exports fell an annual 5.7% and imports rose 24.3%. High imports mean more demand for foreign money and this puts pressure on Indian Rupee.

2. Less Foreign Investments: Foreign investments into Indian stocks have went to negative with $545 million outflow in April 2012 from a mere $7.2 million inflow. Foreign Direct investment fell to 2.2 % in February 2012 from 5.7% in May 2011.

3. Fall in Forex Reserves: The country’s foreign exchange cushion is dwindling. India’s foreign reserves fell to around $295 billion on April 20,2012 from about $321 billion on September 2,2011, after RBI sold dollars to prop up the currency.

4. Scope for RBI intervention Limited: Central banks intervene in the forex markets to either prop up the local currency by selling foreign exchange or push it down by buying foreign exchange The scope of RBI in intervention is very limited in our country.

5. Rupee needs global banks to adopt easy money policy: Global central banks are not cutting interest rates or releasing money into the financial system .

Comments and suggestions are welcome

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2 thoughts on “REASONS FOR RUPEE BEING AMONG WEAKEST CURRENCIES

  1. The resons for Rupee being the weak currency have been correctly identified.I would like to further elaborate the resons .If we anlyze the contents of our import and export one thing stands out.We are vulnerable on both the counts.Our imports comprises mostly crude oil.The prices of oil are as unstable as mercury.Our entire economy is dependent on oil and we donot have leverage of import substitution.Conversely, our export is not as monopolistic ,so to say,as our import.Our export is mainly agriculture-based.That is why Rupee doesn’t command as much respect as many other currencies.

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  2. Value of currency is a reflection of the strength of the economy. Though politicians talk about “India growth story” the fact is that our fundamentals are not so strong. Look at the IIP figure, GDP growth rate (5.3?) of the last quarter and the current inflation rate. Fiscal deficit is far above the estimate. As of now there is no policy initiative from the government side to improve the investment climate. So my opinion is that the fall in the value of Indian Rupee is caused more by internal factors and less by international issues. It is good that RBI didn’t reduce repo rate of CRR. Inflation which affects a large majority if population should be the prime concern of RBI, and not the minority wealthy people who deal in stock markets.

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