Some Reasons For Falling Value of Rupee vs Dollar
The Indian rupee has broken the 60 to the dollar barrier. It has been continuously depreciating with periodic intense slides. The weak rupee makes it difficult for the Indian economy to register a equitable GDP growth for most of its citizens. With the global economy in a depressed state the Indian exports are not able to register a spurt in spite of the advantage provided by the falling rupee. However the country's import bill gets inflated. What are the reasons that the dollar keeps loosing value against the US dollar? Some of them are presented below :
Inflation
The difference in the rate of inflation between India and USA affects the rate of exchange between the rupee and the dollar. Let us assume that one US dollar is equivalent to Rs 100 on January 1, 2013. If on December 31, 2013 the inflation rate in India is, say,10% and it is,say 5% in US,then the new exchange rate would be $1.05 equal to Rs 110. This would mean that now one dollar would fetch app. Rs. 105, thus registering a 5% fall in its value during the year. This correction goes on throughout the year. Because the rate of inflation is almost always much higher in India than USA, the rupee depreciates against the dollar.Thus inflation contributes significantly in lowering the rupees value against the dollar. It is therefore very important that inflation should not only be controlled but also brought down significantly to arrest the fall in value of rupee.
Current Account Deficit (CAD)
Almost always the country's import bill is higher than the export earnings every year. This results in deficit and is known as the Current Account Deficit or CAD. This creates a high demand for dollars which are in short supply because of lower exports. This results in the price of dollars going up and more rupees have to be paid for buying dollars. It is doubtful that export earnings will be higher than import outflows for many years. India imports nearly 70% of its petroleum needs and imports large quantities of gold. India has to meet its defence equipment through imports. Gold imports are increasing considerably and touching nearly 160 tons every month on last few months compared to last year monthly average of 80 tons. Imports of gold are costing the country upwards of nearly $ 60 - 70 billion per year equivalent to around 11% of the import bill. Petroleum imports account for nealy 35% of the total import costs. This mismatch between exports and imports puts pressure on the rupee and makes the dollar costly ass time progresses.
Foreign Investments
The dollars coming into India in form of investments for creating productive assets are the best way of attracting foreign capital. Its flow depends on the pace of economic reforms by the government. As we are aware , since many years it has been very slow due to political problems. Thus the window for flow of dollars is practically shut resulting in very less inflow of dollars into the country. The policy paralysis on this front as it is referred to is a realty. India should adopt liberal policies which will accelerate foreign investments and thus bring dollars. This will help in reducing pressure on the rupee. This is an area which needs to be dealt with by the government on priority basis as it also will help in creating jobs in the country.
Foreign Institutional Investments(FII)
Every year billions of dollars are invested by FII's in Indian equity markets which results in inflow of dollars into the country's economic system. but when the rupee starts depreciating the FII's start withdrawing the invested dollars becuse wht they invested at Rs x to the dollar they have now to buy back at Rs x+, regucing their earnings. This compounds an already worsening situation further as the flight of dollars results in supply constraints making it still more costlier. The FII's invest purely for earning and when rupee starts falling they withdraw their funds to safeguard their dollar values.
Budgetary Deficit
The annual budget of the government is running a high deficit of around 6-7%. It is because its expenditure is higher than revenue earnings. This results in increased borrowings by the government to meet its expenditure obligations. As government is considered the most safe borrower it is able to attract large volume of funds from the markets. This leads to other borrowers having to compete with the government and pay higher interests. This makes the rupee costly in internal markets. This makes doing business in India costly and makes products and services costly thereby reducing its competitivity in global markets and reducing the inflow of dollars.
Hawala transfers
The transfer of dollars and rupees through non banking channels is a big source of leakage in the economic system of the country.The dollars that should come into the country's kitty and thus increase the supply get siphoned out. This creates shortage of dollars. Also it is a route which many times is usede to harm the country's economy in various ways.
Lack of World Class Products
India's exports still consist of a significant share of natural products like cotton. iron ore, tea, rice, wheat. castor oil etc. which are not by themselves capable of being marketed as value addition products. Technologically superior products created in India are almost nil. IT sector exports are in the service sector and can be said to give an edge to India in the world over other countries to some extant earning around 435 billion equal to 10-12% of India's total exports . India is still relying on the advantage of lower etc in the export markets and repeated devaluations give it cushion to quote less in terms of dollars to increase its competitively. R&D expenditure is still very low to result in technologically superior products. Till this situation improves India's exports will not be able to command high prices in the export markets.
As seen from above reasons the chances of rupee becoming stronger against the dollar are very low or impossible. The rupee will continue to slide against the dollar at regular intervals. It is already being predicted that the dollar will fetch around Rs 75 during end 2014 or early 2015. The Pakistani rupee is already more than 100 to the dollar.
We have to accept the fact that rupee will keep declining against the dollar and in the process making our imports more and more costly especially petrol and diesel and the spiral price rise in all products thereof. Increased flow of dollars through investments and exports can mitigate it to a large extant, but for that the government has to act.
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