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Sunday, 11 December 2011

Why India is struggling with depreciation of rupee and how effective it is?

In the first half of fiscal 2010-11 the Indian economy grew at a healthy rate of 8.9%. India's economy has become increasingly interlinked with global markets.
The USD-INR Exchange rate is an important indicator of investor sentiment and can significantly impact not only the fortunes of individual firms and sectors but also the government.This Exchange rate has been very stable overall for the last five years. On April 24 2006 it was 44.86 and on April 2011 it was 44.34. USD-INR moved from 40 to 52 from March 2008 to November 2011.

There are significant factors to increase USD-INR Exchange rate (or) fall of rupee against dollar.

1. Inflation is at an all-time high: The Consumer Price Index (CPI) increased by 10.88% in 2009 and by 13.19% in 2010.The monetary policy changes undertaken by the government to control inflation have been ineffective. We believe this is because inflation is being driven primarily by structural supply side challenges such as lack of agricultural infrastructures, low crop yields and the obsense of organized retail.

2.Decline of FDI for long term prospects: India is one of the fastest growing economies and is considered a favored destination for investment. But we have seen the decline of FDI in the year 2010. FDI is an important indicator of investors faith in a long-term prospects, but FII(Foreign Institutional Investors) provides short -term portfolio investment money inflows.

3.Corruption: Recent widespread corruption scandal have reinforced the negative perception of governance deficit in India. Regulatory and tax uncertainty will deter many foreign investors.

4.Decline of Remittances: Another major source of foreign currency inflow to India is remittances. India received USD 55 billion in remittances during 2010.Remittances from countries like Saudi Arabia and UAE experience a decline as unemployment in these nations rises.The Indian abroad leave the region due to security concerns.

5.Government failure: The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10% of GDP .Experts believe that oil prices will remain high in the near future. This is a major concern for India as it imports about 70% of its oil and efforts to increase the production capacity of Petroleum and natural gas domestically have not been successful.

6.Deficit level:India's current deficit is about 3%, the level it reached during the crisis of the 1990's. India's rising import bill and threat to remittances, the deficit will remain high in the near future creating pressure on the Indian Rupee.

How it is effecting our economy?

Unstable Rupee is always a case of concern for both exports and imports.

Exports:In case of exporters ,Rupee depreciation means short-term advantage. Those exports who hold their products would be benefited. However the Euro zone crisis and global meltdown have affected exports from making the desired profit.Demand slowdown in US and Europe . The government is focusing more on Africa and Latin American markets.
India's total exports in the year 2009-2010 is 84,553,364.38 and in the year 2010-2011 is raised to 114,264,897.18. Growth rate is 35.14%.
Our max exports to the countries UAE, and USA.

Imports: Imports are losing ground owing to the devaluation. Indians imports are about 70% of its oil. Experts believe that oil prices will remain high in the near future.Coal and some raw materials are also importing from other countries
India's growth of importing rate rises to 35.63%. Our max imports from the countries china,UAE,Switzerland etc. 
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Investorpedia said...

Nice Post :-)

Dinesh Rishi said...


Good Initiative

waiting 4 ur mail :D

worldknowledge said...

Santa said...

Really well written.... thanks....

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