Tuesday, February 21, 2012

Why Is The Indian Rupee Depreciating Against The US Dollar?

India is not only the second largest country in the world, but also the second fastest growing economy. India has become the hub of many foreign and international brands, which set up their regional headquarters in India.

But despite the various transitions that the Indian economy is undergoing, the Indian rupee seems to be deflating in comparison to the US Dollar.

What is the actual reason behind this?

When the world experienced one of the greatest recessions, India bore the economic storm and stood robustly with a growth in all sectors that impressed its GDP.

As per the CIA Fact book, India had a GDP of 237 trillion US$ in 2008. An Achievement of 6.6% GDP growth.

The per capita income of India is estimated at 4,542 US $ in the context of Purchasing Power Parity.

The ministry of finance data shows Indian export growth by 7.3% in dollar terms during April-February 2008-2009. The unemployment rate stood at 6.8% in 2009 against the 7.2% in 2007 with an inflation rate of 7.8%.

Though the Indian economy has been stable and reliable in recent times, the last few years have experienced a positive upward growth trend which has consistently produced 8-9% annual growth rate which has been supported by a huge inflow of foreign funds.

The growing reserves in the foreign exchange sector, both an IT and real estate boom, a thriving capital market all have made their contribution to India's GDP growth.

Based on the statistics which were provided from the department of state, there is a huge and growing population of middle class Indians numbering more than 50 million. Indians with disposable income ranging from 200, 000 to 1000, 000 rupees per year increased when the US dollar weakened a little in the last two years.

The Indian Rupee grew steadily and appreciated vis-à-vis US dollar with 0.020837 USD equal to 1 Indian Rupee (x-rates.com)

So, when the RBI started sucking out the excess liquidity flow from the system, which was caused due to huge capital dollar inflows, they are now compelled to reverse their stance and infuse liquidity back into the system. Therefore previously where the CRR was hiked, the RBI reduced the CRR, repo rate and decided to adopt an increase in the reverse repo rate. Since there is a shortage of money supply in the system, the credit has reduced in the market, thus devaluing the Indian rupee in comparison.

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