The FALL and FALL of Indian Rupee --  Will it raise ?

Lately we have been hearing in news that Indian rupee is losing its value against dollar. Investors are expressing their concerns, RBI is announcing some measures , The Finance Ministry and the political elite are assuring general public that rupee will shortly regain its value. It fell way past the psychological value mark of 60 !!!  -- 1 USD = 60.72 INR...

Is it really sinking !!

The biggest question for which everyone is waiting to find an answer..Why is rupee sinking ? More precisely how does it matter to us as a common man whether rupee gains or loses its value in foreign exchange market.. I try to throw some light on this current situation  - fluctuating rupee value.. News papers and financial articles blame different factors for devaluation of rupee - Current Account Deficit (CAD) , Banks' Non Performing Assets (NPA), Tepid global growth and external sector challenges are some of the factors that caused pressure on exchange rate as explained by our central bank (RBI). Before giving a damn about these factors, when we try to understand in simple terms :

One of the major factors that determine exchange rate is Supply and Demand. In this case supply and demand of USD (US Dollar) into Indian market regulates the exchange rate. Examining the sources of demand and supply for USD in India : Import industry that makes payments for products purchased in USD and Individuals/Companies that are interested in investing abroad are major sources of demand where as Export industry that earns in dollars by selling goods and services, Overseas companies that are interested in investing Indian markets are major sources of supply. INDIA exports Petroleum products, Iron and Steel, Chemical,Vehicles, Machinery, Spices, Buffalo live stock and many more which contributes to export revenues where as Gold and Oil imports contributes 45% of the total imports which increases the cost. When Exports and Imports balance each other, such a situation is called Balance of Trade (Ideal situation), when Exports >(greater than) Imports, it is treated as surplus (a positive situation) where as in India  Exports <(lesser than) Imports called as Trade deficit (Current Account Deficit). Since imports are greater than exports, there is high demand than supply, increasing the dollar value.In short , the more imports we make, more will be the demand for USD and rupee value depreciates . This is the reason government encourages people to use domestic products and posts circulate in face book to use Indian goods :)

Second reason for rupee sliding is  : Inflation, The more the inflation, the higher the depreciation of rupee..When we look at purchasing power of INR , say an item which costed 50 rupees an year ago with an inflation rate of 10 % becomes 55 rupees this year, where as in US the inflation is less and the item costs almost same this year and last year, in this example rupee value is devalued as its purchasing power dropped.

Also as international markets collapse, for example Euro crisis : It effects growing economies like India since we have to rely on exports to uplift our economy, if the exports are restricted in euro zone due to financial crisis, it indirectly effects our exports there by leading to large CAD - Economy slumps. As a result Foreign Institutional Investors (FII) who were investing in India backed out and started investing in safer havens (US) further widening the gap - These are external challenges and RBI is framing guidelines and policies to handle such scenarios and to boost investors confidence.

The price of every commodity is driven by market forces, if demand is high, RBI ensures that prices do not fluctuate heavily - because that might benefit one section of society and prove fatal to others : For example Onion prices go up - onion trades make money but restaurants make loss.So, what we are looking at -- does a weaker rupee means weaker economy - Economists say countries across the world try to weaken their currency, so that consumers will buy less foreign stuff, as the foreign stuff will be more expensive in their currency and export more to improve their economy. A weaker exchange rate does not mean weaker economy - 1 USD = 100 Japanese Yen does not make japan a poorer economy than India!!

Economy should be moderately controlled, RBI does this either by increasing forex reserves or by increasing cash reserve ratio`s.Currently India has a forex reserve of  $ 294.82 billions, If rupee value suddenly drops and if 1 $ = 1 INR, then the pizza that costs 10$ will be available for 10 INR and there by demand for domestic products falls in turn leads to crash in domestic market and economy drops - If we are getting an imported product for the same price as domestic product which one do we prefer !! This is the major challenge for RBI on how to manage rupee value against dollar

Who gains if rupee falls :
1) Service Industries which are getting paid in USD for their services - though Nasscom chief stated that in long run there will be no benefits for IT industry, we cannot decline the fact there are benefits.
2) Expats who are earning in US can transfer and accumulate more in INR as rupee falls.
3) Export industry gets benefit - as they get paid in USD

Who loses if rupee falls :
1) Investors who want to invest in foreign currencies have to invest more because of exchange rate - sliding rupee discourages investments in foreign entities - rather it indicates people to put money in our country to improve our economy
2) Students who pursue higher education abroad, ends up paying more as rupee falls - discourages brain drain and tries at enhancing quality in domestic academic institutes to refrain local cream
3) Consumers who buy foreign goods - they have to pay more for same product - boosts domestic markets

So is it good if rupee falls.. !There has to be a mixed answer . Conclusively,there are many factors that arise from the economic structure of Indian economy that affects the evaluation of exchange rate which in turn effects the economic growth rate of a country. Wish our central bank and Finance Ministry takes proper steps to elevate our economy and boost investors interest.. Hoping for a day where other currencies should try to peg their currency with INR like today we do with USD.

Interesting fact

You Know, Chinese economy is the worlds second largest economy with a growth rate of 7.8% in 2012. It is projected to overtake US by
2027 if it continues with same growth rate.
They have Strategic National Projects and build local infrastructure. A travel from center of Shanghai (largest city in china) to its Airport  takes only 8 minutes in magnetic levitation train. Imagine the time they can save and trade they can do....
Have we ever imagined to reach airport in less than 10 minutes, from center of any city in India.. !!!!!

PS: Interesting fact has nothing to do with sliding rupee :))