Dollar Vs Rupee – The Battle Of Economy

As many of you have asked me about the Rupee-Dollar issue, I thought of putting in my views on it. I will try my best to use simple language, as most of the visitors here are just retail investors and not great financial freaks.

As we are observing that since past 18 months or so, dollar is continuously gaining strength against rupee, we are bound to think that US economy is getting stronger and Indian economy is going weak.

Is the above statement a fact or is it just an irony? Let’s figure out.

We think this way because we feel country’s financial position is determined by the strength of its currency. But it’s always necessary to figure out the reasons behind what is happening in the financial world, and then decide, who should be blamed for the current situation.

1)      Where did it all start?

Some 18 months back, the level of recession was more in US, than in India, and that was the same reason why dollar was going from strength to strength against all the currencies in the world. The big institutions in the US were going through a very bad period and suffering losses from their business. To stabilize those businesses, the only option they were left with was to withdraw all their investments from other countries, which accounted for heavy selling of local currencies in each country and in turn, heavy buying of dollar. (This may well be the factor today, as well, to some extent)

2)      Step from US Federal Reserve:

Ever since the US Federal Reserve has declared its intention to lower the asset purchase program, the country’s economy has been under pressure. Lowering the asset purchase directly means that lesser money will be injected into the system, which in turn, will increase the cost of money in US. This directly means that the inflows in the emerging markets like India will get reduced. And India being a country, which is highly dependent on foreign flows to fund its current account deficit, the rupee will continue to slide down.

3)      Indian equities going down:

FII’s have always been a major investor in Indian markets, and as I have said earlier also, the trades done by FII’s exactly represents the pied piper effect. (If one does, the other follows) Right now, the effect is on the selling side. Heavy selling has been seen by FII’s in recent times, which has led to heavy selling on Indian Rupee and heavy buying of US Dollars. The output of this is quite evident. As per the reports seen on NDTV, this year, FII’s bought shares worth 90000 Cr Rs so far this year.

4)      Current weakness in rupee leading to further weakness:

In simple terms, the depreciating rupee lowers the buying power of India as a consumer and it increases the cost as a producer. Almost every major organization in India has got heavy debts in terms of dollar. This will directly affect the earnings in coming quarters, as the company needs more money to pay the dollar debts. Lower earnings will restrict the number of FII’s investing in Indian company and hence lower money will come into the system, which will further depreciate rupee valuation.

5)      Continuously rising imports and hence trade deficit:

According to reports, Oil and Gold accounts for 35% and 11% of country’s total import. All the buying for Gold and Oil should be done in dollars, which means that Indian companies has to sell rupee and buy dollars, with which they can import Oil and Gold. This also, heavily leads to weakening of rupee. Hence one can see the Finance Minister forcing the reduction in Gold imports, which has heavily impacted Jewellery stocks in India.

Trade deficit, as defined by investopedia, is an economic measure of a negative balance of trade in which a country's imports exceeds its exports. Now it must be quite obvious for people to understand why trade deficit is going higher which is not a good sign for country’s economy.

 

Difficult to figure, whether it’s just Indian macro-economic data which has led to fall in rupee or there has been a heavy involvement of US in this process. Its highly debatable and never ending topic. But the points mentioned above are the prime factors for the fall as far as I feel. Someone may have his own ideas, and he is free to share his own thoughts in the comments section below.