Thursday, November 24, 2011

ON DEPRECIATION OF INDIAN RUPEE

IT appears that the new logo for the Rupee could not bring in any luck for it.        
The Forex news citing the free fall of Indian Rupee are on the front page of  newspapers in India and both the finance  Ministry and the Central Bank are clueless how to handle it, as the factors for the dismal performance are both internal and external.  The Rupee depreciated above 16 percent in terms of Dollar since the downfall started and it has now become the 4th most depreciated currency in the the world and the first most depreciated in Asia. It is alarming for a nation importing 80 percent of crude for domestic consumption.


Since Euro crisis began the Dollar strengthened at the expense of Euro as investors preferred Dollar to the Euro putting dollar on a firm footing though the U.S.economy is still not recovered. As for India, while the the fundamentals are good  there is a huge trade deficit which is a dampening factor for investor confidence. The foreign investors (they are fair weather sailors) started to withdraw funds from equities which increased demand for the dollar as they demand dollar for the Rupee they got from the shares. At the same time export market has not been faring well. All these issues and others are now bringing down the value of rupee on an hourly basis.


There are devaluation and depreciation in the life of a currency. The devaluation (in fixed currency) is a willful act done by its Government to equate the currency value with other currencies on extraneoues circumstances whereas depreciation ( in floating currency) happens automatically in accordance with the economic conditions of its country. The currency business takes place round the clock mainly (70%) between central banks of respective countries. A country's financial health is the criterion for the depreciation or appreciation of its currency.When the financial fundamentals of a nation are weak the central Bank would be constrained to agree for a lower value for its currency. The currency market is  the greatest liquid cash market and on a single day about four Trillion U.S.Dollars are changed hands
in financial centers round the globe.

The depreciation of currency makes two different reactions in a country. While some people are happy with it, some others are gloomy. The exporters are happy as their turn over might increase on conversion and it is vice verse for the importers who have to eke out more rupees to get dollars to make imports. The Indian companies borrowed from abroad will have to spend more to settle the loan which in turn may reflect in the stock market making those who have invested in such export oriented companies, a little poorer


Those who are working abroad and receiving pay in the foreign currency will  benefit if they choose to change them in to rupee currency. The I.T. companies might also benefit by their export of software.


The oil companies are the biggest buyers of Dollar ( from Indian Reserve ) and it is said that a depreciation of one rupee against Dollar means paying 8000 crore  rupees more for the oil import. The oil companies have to download their expenses somewhere and who is better placed to carry the burden other than the poor common man ?  The companies off load it by increasing the price of petrol, diesel and cooking gas which would create a general price hike in all commodities as the vehicle companies increase rates for transportation charges.The other importers would also transfer the loss to the general public. It all finally creates inflation in the country. But then what we call inflation is actually depreciation of the value of money against commodities. The depreciation of currency thus affects both inside and out side the country. 


The falling value of currency will reflect in share market too. The depreciation of a currency is  considered an indicator of a disease in the economic system of the country and knowing that foreign investors would want to withdraw funds. Since they bought rupees  ( from the Reserve Bank giving Dollars) to buy Indian shares,  they  will demand Dollars ( giving back rupees on selling shares) when they pack up. The Government has to find Dollars for them also in a time of distress. As big investors sell shares the price of share will come down and it will affect the Indian investors too. 


Thus the depreciation of currency affects the common man in the end, as in all cases 








Image from net


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4 comments:

Shukoor said...

Whatever the Euro crisis and Dollar booming may be, we expats are happy. we are getting more than rupees 14 against one Dirham in the transaction. We had a bad time also when the Indian rupees was strong before the global financial crisis 2008 begins.

V.M.S. said...

Lucky man...

Thanks for the comments

Sathi said...

As usual, original thinking, simple, easy-to-understand presentation. Thanks. Pl keep writing

Indian Social Affairs said...

Cool, lucky guy