“The rupee weakness is basically due to the European crisis and has nothing to do with the domestic economy,”
Historically, the Indian Rupee has been depreciating roughly in line with the fall in its Purchasing Power Parity (PPP) since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was Rs 9.30 per US Dollar. It is the inflation that negatively impacts PPP and pushes a currency down. But the present spike was rather sharp on the back of debt default concern in the euro zone and after the downgrading of two largest French banks, besides Lloyds Insurance withdrawing its deposits from European banks have led to euro losing its value against dollar. As large banks, investors and financial institutions started selling euro and bought dollar, the latter appreciated against all major currencies including rupee.
From the start of this financial year, the Indian Rupee has depreciated by 6.86 per cent and it was the worst performer among major Asian currencies losing nearly 12 per cent of its value since touching its 2011 high of 43.85 against the dollar on July 27. The rupee would have fallen further but for the market intervention by the Reserve Bank of India.
One school of thought is that unlike its Asian peers, the RBI could not have intervened in a big way in the currency markets with its fragile holding of foreign exchange reserves. Avers Jamal Mecklai of Mecklai Financial Services: “The RBI is going to intervene only if it is meaningful. The biggest issue is of course the uncertainty with the Euro. Nobody believes that the Euro problem is solved.”
Gainers of Rupee depreciation
When a currency depreciates, the exporters rejoice because they get more of the local currency for every unit of foreign currency though the quantum of trade remains unchanged
When a currency loses its value it creates many problems for the economy. It leads to high inflation, as India imports around 70 per cent of its crude oil requirement and the government will have to pay more for it in rupee terms. Apart from fuel prices, medicine and all imported material would become costlier. So, Indians should better start using “Swadeshi” products to rule out the negative impact of branded us produces.