Its lowest point was on Wednesday last. The rupee fell to yet another all time low of 68.75, the biggest one day fall in 20 years. Another big psychological mark of 70 appeared to be ominously close. The decline in the rupee on Wednesday was matched by a fall in the stock prices. The latter, however, recovered towards the close.
While, on most occasions, the stock markets and the rupee have invariably moved down in unison, the recovery in stock prices even when the rupee remained weighed down is a recent development. It probably gives hope that the markets are able to discern the different factors that pull down the rupee and the stock prices. It is a tantalising thought but are some foreign investors buying Indian stocks even while a majority of them are seen deserting the domestic bourses? Much of the recent analyses has centred on the reverse movement of short-term capital flows to the U.S. and other developed markets in the wake of a possible ‘tapering off’ of quantitative easing by the Federal Reserve. As returns from the developed markets improve, the incentive to stay invested in big emerging markets such as India vanishes.
The pull out by foreign institutional investors — selling Indian stocks and repatriating proceeds in dollars — has hit the financial markets hard through lower stock prices and lower rupee
The main reason for falling rupees is short in supply of dollars. Law of supply works here as the demand for crude oil rises in India, demand for dollars also rises but due to limited supply of dollars prices of dollars rising while value or rupees falling down.
There are quite a few reasons for the depreciation of the rupee against the US dollar, a few of which will be discussed. According to the elementary law of economics, if the demand for US dollars in India exceeds its supply, then the dollar’s worth will go up and that of the Indian rupee will come down in that respect.
The outlook of the US economy is better and is anticipating a good degree of growth, and the Federal Reserve has hinted that it may end its fiscal stimulus — implying that the dollar supply will decrease. In the short term this can lead to the dollar becoming stronger than other currencies, including the Indian rupee.
Crude oil is quoted and purchased in dollars. When the price of crude oil rises, more dollars are demanded which the US dollar.
Now, depreciation of a currency can also have its perks. Indian’s exports can rise. However, this may not be possible in the face of inflation in the Indian economy. Inflation will increase the price of raw materials and diminish the competitive gains from depreciation.
Similarly, we can also think that ‘Made in India’ products can now flood the Bangladesh market since the cost of rupee in terms of taka has fallen. However, if inflation rises, we cannot really reap the benefits of the falling rupee. Bangladeshi exports to India can move either way; exports can decline as India may buy less of Bangladeshi products since importing is more expensive now. Inflation in both countries should also be taken into account. Bangladesh’s exports to India can also rise; if inflation rate is high in India, then Bangladeshi products can be relatively cheaper and it can still pay off to import from Bangladesh. If inflation rate is close in both countries then Bangladesh is likely to take advantage of the falling rupee and import more from India, at least in the short-run.
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