Sunday, September 01, 2013

Why the Rupee Fall

The market sentiment is the major player in the fall of the currency of any country.  US Dollar is an international currency unlike Indian Rupee, so all imports are converted into USDs and for all exports India earns USDs.  When there is favourable condition in the market, the sentiments support the home currency and vice versa.

This is primary reason.  However there are other reasons as well.  In order to improve growth parameters, a country is required to spend money on the projects and sustainable endeavors.  For this there are two options available for a nation, one it can print/mint currency and another one to collect the currency from the market.  First option requires similar collateral for security, which is not the case for the second option.  US federal government announced collecting currency (USDs) from other nations, which made USD a valuable currency following Demand-Supply law of economics.  This caused the fall of rupee as well as fall of many other currencies of other nations.

When a government shows its concern more on the welfare side and divert fund for subsidy it amounts to Current Account Deficit.  Higher CAD affects market sentiments negatively which causes foreign investors (individuals as well as institutions) to withdraw their deposits or to put hold on their projects.  It also slows down the process of inflow of USD, which results in shortage of currency and leads to devalue rupee.

In brief there are following reasons:

a. US federal govts initiative to pump in more USDs in US.
b. CAD deficit
c. Shortage of USDs in India
d. Negative Market Sentiment.

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