Causes and effect of free fall of rupee against dollar

Causes-: 1) Anticipation of Tapering of quantitative easing from US federal bank. ) !uring recession US "ederal bank decided to give stimulus to econom# t$us infusing truck load of cas$ in market at ver# lo% interest rate&t$is c$eap mone# found it's %a# in emerging markets like (ndia)because intrest rates in US %ere lo% investors %ere not getting enoug$ return on t$eir investment) %$ere it got good returns. *) +ut no% prospects of return on investment $as become better in US so all t$e c$eap mone#)dollars) %$ic$ came in (ndia during recession is going back to US because no% t$e# can fetc$ better returns t$ere.)!emand of dollar increases and it's value goes up) ,) S#rian crisis $as been an addon to t$is situation &but $o%(f US plans to attack S#ria t$an it %ould be requiring truck load of mone# to carr# out it's operations&%$at %ill t$e government do-..it %ill issue bonds %it$ $ig$er return rates so people %ill start bu#ing t$ese bonds instead of investing in markets like (ndia&inflo% of dollar in (ndia %ill again take a $it and rupee %ill decline more..oreover US %ill demand more oil to carr# out it's operations and suppl# %ill take marginal $it )S#ria is marginal e/porter of oil) so prices of crude oil in %orld market %ill sore)demand increases s$arpl# and supppl# takes a $it). 0) 1olic# bottlenecks -: time and again %e $ear t$at govt $as increased "!( cap in t$is sector and t$at sector but merel# increasing t$e cap %ill not result in coming of actual "!(&and %e rank deep in list of nations in respect of ease of doing business.A reason %$# investors are not investing t$ere dollars in (ndia. 2) 3uge demand of crude oil and gold & t$e demand of dollar rises to bu# t$em and rupee takes a $it subsequentl# %idening t$e Current Account !eficit. 4) 5/port of (ron ore from t$e mines of 6oa and 7arnataka $as been stopped because of Supreme court order to stop mining in t$ese areas.)!ollar inflo% takes a $it)

Effects of sinking rupee against dollar 1) (mports )ma8or oil) becomes costl# -9transportation cost of products increases -9commodities price increases speciall# of food. ) A ma8or setback for import dependent industries&subsid# burden on govt %ill increase )like urea %ill come costlier and govt %ill still provide it at same rates). *) :ur most po%er plants are coal based and t$anks to inefficienc# of coal (ndia and environment regulations %e $ave to import a significant amount of coal from countries like Australia ;9 coal price %ill s$ot up;9po%er generation %illl become costlier. ,) "oreign investments)mainl# "(() %ill be effected )is e/plained in detail later)

0) <orsen t$e alread# unsustainable Current Account !eficit. Few pros of sinking rupee. 1) 6ood for e/porting companies like soft%are firms &+1:s etc)but t$at too in s$ort term because for bidding ne% pro8ects t$ere %ill be $ig$ uncertaint# if rupee is volatile %$ic$ %ill $arm in long run) ) (t %ill incentivise e/port orianted manufacturing companies encouraging t$em to e/pand. *) "!( %ill be more luring as profit margin %ill increase.)3o%-...e/plained belo%)

Effect of all this on Foreign Investments. "oreign investments are of t#pes -: a)"(( and b)"!(

(f A foreign investor $as done an investment on %$ic$ $e gets a fi/ed return in fi/ed time periods)most "((s are like t$is) t$an t$e value of $is return %ill decrease )suppose on 1=t$ september 1>;1re and on 11t$ september 1>; rs t$en if return on $is investment %as 1re t$an on 1st september $e %as getting 1> but ne/t da# after depreciation $e gets =.0> because t$e return in rupee term is same t$at is 1re but it's value %it$ respect to dollar $as declined) (f a foreign investor invest in "!( or in broad terms if $e sets up a plant in (ndia and start manufacturing somet$ing& or take t$e classic case of <almart ...before rupee depreciation <almart $ad to spend more dollars in it's operations but after depreciation it $as to spend lesser dollars but one s$ould keep in mind t$at if <almart is taking it's profit back to US t$en it %ill not give it an# benfit because of t$e same reason t$at it's profit vaue %ill also depreciate but if instead of taking back it's profit to US&<almart invests in it's operations going on some ot$er countr# sa#s Singapore&.ala#asia or an# ot$er nation %$ose currenc# $as not appreciated against rupee as dollar t$en t$is transaction %ill accrue profit to <almart.

Full name

Nikhil Sharma,