The above question has
bugged the economists from all over the world from last few months that why the
Indian rupee is behaving in so much volatile manner that it’s next to
impossible to predict, which pit of low price it will hit the next moment?
I was browsing yesterday’s
(Friday) newspaper and I was shocked to see that the rupee had hit the mark of
52.20 against the US dollar, a three month low price.
It’s a cruel fact that
the currency has been weighed down by a host of worries and most of them are not
likely to fade away in recent future. So let’s be prepared to see the rupee
hitting new lower levels. There are so many reasons which are responsible for
the current position of rupee, few most important of them has been discussed in
this post.
One of the biggest reasons
which is causing rupee to depreciate, is our trade gap (the difference between
imports and exports). The govt. is trying to fill this gap by remitting foreign
exchange and other payments. The current
account deficit or CAD is about to hit the figure of 4% according to the new
estimates. It clearly indicates that the demand for foreign currency will be
much higher than what will be earned, which will further cause rupee to pound.
Secondly, the global
crude oil prices are still going north and crude oil imports accounts for the
largest expense in India’s import bill. India imports 80% of
its annual oil requirements but sadly nothing much can be done about it.so it’s not
very difficult to infer that the demand of greenbacks will be high by the state
run oil companies. But as global economy is also facing a downturn (due to European
crisis), everyone is trying to find a safe haven by buying dollars which is
causing a shortage of dollar in forex market. This will also cause relentless
pressure on rupee. There is not much scope of export earnings in this field, so
no scope for relief too.
The concern of
inflation has again come on forefront by the RBI’s move of 50 basis points decrease in its policy rate, repo rate. The figures of Wholesale price Index
also clearly shows that the inflation will hover around 7% in 2011-13 and the economic
growth is also not expected to rise much above 7%. So the possibility is very
high that foreign investors might move their money out of the country in search
of an emerging market star. If foreign currency will move out of the country,
the value of rupee is bound to fall.
Finally, the govt.
seems helpless to lift the economy from the current situation. I literally
jumped out of my bed when I read the comment of our outgoing chief economic advisor Mr Kaushik Basu that it’s very unlikely
that major economic reforms will happen before next parliamentary elections. If
this appalling prediction comes true, it’s almost sure that the country will be
facing a severe refractory inflation, moderate to low economic growth and very
high CAD in the coming financial year.
To conclude I can say that
the economy is heading towards the stage of stagflation and nothing is being done to stop it reaching there.
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