Rupee Plunge May Blunt ‘India Shinning’
Monday, June 3, 2013
India is the largest recipient of remittances in the world.USD 70 billion with the rupee plunging by around two per cent in just a week; this is good news for the non-resident Indian (NRI) community, who are in the habit of remitting money to India regularly. Now they get more value for the same dollar amount or any other currency for that matter. At its lowest in the past 8 months or so, it brings smile to all the Indian expatriates across the globe But what about the overall Indian economy?
It is a cause of concern for policy makers, experts, investors, businessmen and even the common man. The depreciating rupee raises the price of imports. India mainly imports crude oil, fertilizers and gold. This, in turn, has a domino effect on cost of living and inflation.
So why exactly does a currency depreciate? The value of a currency depends on several factors. (1) The demand and supply (2) The relative inflation of trading parties.
The main reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched its three-year high level of 84.30. The record setting performance of US equities and the improvement in the labor market has made Americans more optimistic about the outlook for the US Economy, thereby spurring greater hopes of QE tapering.
The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was seen holding the key level of 1.30, has dropped lower to 1.29 levels on the back of deterioration in the local economic data. For the past month, investors have been selling Euros and buying dollars on the premise that the Euro zone is in a recession; and the ECB is considering more stimulus at a time when the Fed is considering less.
The country with high exports will be happier with a depreciating currency; the same does not apply for India. India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil, which constitutes a major portion of its import basket. The other worry is the GOLD IMPORTS. India is one of the major Importer of GOLD. India devours 850 tons of gold every year. A large part of the import bill is driven by other resources as well. The facts show that fertilizer imports surged by 30% in the last two years and coal imports have doubled.
Will the rupee still drop? Has it bottomed out? The medium term rupee will strengthen, because we see the real green shoots in the Indian economy and the inflation being teamed by the reserve bank of India, so it is good time to send money back home.
* by Mr. Adeeb Ahmed - CEO of Lulu Exchange
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