Rupee Depreciation, its causes and concerns

For the last couple of months, the sliding rupee has created consternation among many in the Indian
economy. It has breached the psychological barrier of Rs.60 to the dollar, and there is fear that even this
may not be a real bottoming out for its value.
Why is the rupee depreciating?
The Finance Ministry has suggested that this is happening because most currencies have depreciated
relative to the U.S. dollar ever the United States Federal Reserve, indicated a possible decline in the
monetary policy of quantitative easing that had encouraged capital to move away from the U.S. in
search of higher returns in other currency assets. In this argument, the rupee has supposedly been
behaving like most other currencies, especially those of the emerging markets, as investors bring their
flows of hot money back to the U.S. economy.
Price of crude: The price of crude puts tremendous stress on the Indian Rupee. India has to import a
bulk of her oil requirements to satisfy local demand, which is rising year-on-year. Globally, the price of
oil is quoted in dollars. Therefore, as the price of oil increases in the international market, the demand
for dollars also increases to pay our suppliers from whom we import oil. This increase in demand for the
dollar weakens the rupee further.
Dollar gaining strength against the other currencies: The central banks of Euro zone and Japan are
printing excessive money due to which their currency is devalued. On the other hand, the US Federal
Reserve has shown signs to end their stimulus making the dollar stronger against the other currencies
including the Indian rupee, at least in the short term.
Volatile equity market: Our equity market has been volatile for some time now. So, the FIIs are in a
dilemma whether to invest in India or not. Even though they have brought in record inflows to the
country in this year, their pull out has resulted in a decrease of inflow of dollars into the country.
Therefore, the decrease in supply and increase in demand of dollars results in the weakening of the
rupee against the dollar.
Efforts so far
The widening current account deficit and the depreciating rupee are definitely a cause for concern. The
banking regulator has been targeting speculators in the currency market .The government, on its part,
has been promising to take measures but barring a few tweaks in the foreign direct investment (FDI)
norms in some sectors; it has not made any serious effort to ensure flow of foreign money to plug the
hole in the current account. The market has lost confidence both in RBI as well as the government. The
rupee depreciation has not been driven by speculatorsit is the result of genuine gap in demand and
supply. The currency market sentiment is bad and bets are all one-sidednobody wants to sell dollars;
everybody wants to buy. This is because they all feel that the rupee will depreciate further.
Its time to take some strong measures. RBI has done its bit but half- heartedly. Before it is too late, the
government must announce steps to pump dollars into the system and serious changes in FDI norms like
in insurance sector to take care of the current account deficit if it wants to reverse sentiment and rein in
runaway depreciation of the rupee. Since the Asian currency crisis in 1997, one cant think of a single
instance of rupee depreciation in the past 16 years when RBI has taken steps but failed to stem the
currencys fall as miserably as we are seeing this time around.