Reasons for Rupee Depreciation

Rupee Depreciation is one of the buzz words in Indian and world economy nowadays. We have already written a few posts regarding the impact of rupee depreciation and the devaluation history of Indian rupee. Here I am trying to list out the possible reasons for Rupee depreciation, which includes both domestic and international factors. After the peak recession time of 2008-09, Indian Rupee was hovering around 44-46 per dollar mark for almost 2 years, till mid of 2011. It then started to slide and breached the 50 per dollar mark in late 2011, mainly due to economic crisis in Europe. 

Hope you all remember, the entire blame for Rupee depreciation was put on to Euro crisis by Indian economic think tanks in early 2012. After that Rupee appreciated a little bit, regained the below 50 per dollar mark. But from March 2012, Rupee again started its down fall, this time more seriously when compared to other developing currencies.

Recently, Indian Rupee breached the 68 per dollar mark, for the first time in the history. A detailed debugging shows that a few of our domestic economic bugs are adding fuel to deepen the crisis.

Policy impacts
India’s back foot play in refreshing the economic policies due to internal political reason is sited as a major cause for Rupee depreciation. The suspense of FDI in multi-brand retail can be w well known example for this. Even though India made a few policy revivals in the area of single brand retail market, pharma etc, these were not enough to attract more foreign direct investment to India. Once we open your market, we have to consistently renew our economic policies and agendas to attract more investment without affecting our domestic interests. But this is a tough job for the Government, especially when it runs in a coalition environment.    

Reduction in foreign direct investment and Foreign Outflow
As I stated above, negative policies not only cause reduction in FDI but it results in foreign outflow as well. Investors, as always, look for more opportunities and if, it seems like they have better destinations to park their money, definitely they will do it. That is the basic funda of open market.

Reduction in export and increase in import
According to Finance Ministry, because of reduction in export and increase in import, on one side the fiscal deficit has increased and on the other, current account deficit is rising. Europe was an important export destination for the country and reduction in the demand there adversely hit Indian exports. Economic recovery was poor and fragile in European countries and this has affected India’s changes to become a net exporter.

Political Uncertainty and Corruption
A coalition government has its own limitation. It chains the Government from initiating proactive economic reforms. Hope you all remember what happened when the railway fare was raised a little bit in the last Union railway budget. Also the second regime of UPA was engulfed by a series of corruption. Starting from Common wealth games scan to Anna Hazare’s campaign were enough to change the mindset of many foreign investors.

High Deficits
Currently we are facing huge pressure from the deficit side - both fiscal and current account. Government of India is spending a worthy amount as subsidies for fertilizers, food and oil. This has resulted in widening the deficit gap. High deficits are considered as reasons for weakness in local economy and can repel foreign investors.

Above mentioned points are the most surfaced reasons for the Rupee depreciation. There could be other micro and macro economic reasons which are hiding behind the screen. Hope you have gained some insight about this ongoing crisis. Any thoughts/comments are much welcomed.

Recent News on Rupee  Depreciation 

28-Aug-2013: Rupee hit new record low : Indian Rupee touched a a record low of 68.85. The passage of the food security bill by Lok Sabha has also put further pressure on rupee, as it has raised doubts about the government's intentions to control fiscal deficit resulted in this record low performance. 

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