Rupee started falling against US Dollar in January 2008 and lost around 15% since then.
Causes
High Trade Deficit because of rising Oil imports. There is a lateral growth in demand for oil in India and the International Oil prices have also gone up significantly.
Sizeable withdrawal of FII money from India on account of profit booking and various other global and local issues such as Subprime Crisis, slow down in global economy on the global front and rising inflation and political instability on the domestic front.
Dwindling ECB inflows as the Capex plans slowed down in India
General strengthening of US Dollar against major global currencies like Euro and Pound.
Implications
Rupee depreciation is good for Exporters as they become more cost competitive in the global market and they get more Rupees for every Dollar they earn.
Rupee fall discourages imports helping the local industries. Thus there is a possibility of an industrial growth.
On the negative side, falling Rupee increases our already bulgy trade deficit and puts a burden on the precious Forex Reserves possessed by our Central Bank.
Rupee depreciation puts pressure on inflation, as we are an oil-importing nation. Any rise in oil prices will directly impact the inflation and thus economic growth.
Falling Rupee will drive away foreign investors and country will be deprived of the capital it requires to sustain the high growth.
Future beckons
Currently, Rupee faces huge pressure from the negative equity sentiments, ever increasing oil demand and low risk appetite of the foreign investors. There is a possibility of Rupee hitting 46-47 mark in the near future,
Rupee management is a tricky and crucial job of the Central Bank and the government. They may have to take a balanced view on it. Once the authorities find Rupee has reached an uncomfortable level, they may (or be forced to) ease the ECB control and the Rupee convertibility to bring back the stability in the Rupee market
