Indian Rupee (INR) today managed
to close at 52.5 levels against the US dollar, which is 5-month high. Earlier I
had discussed reasons for the rupee depreciation against the USA dollar.
Now let’s have a look into various
factors that helped rupee to appreciate –
(1) Weakness in
Dollar: Recently US Federal Reserve came
out with its third round of the quantitative easing under which $ 40 billion of
bonds shall be purchased every month until job situation improves.
Simply put, Federal
Reserve increased the dollar in the financial system and as per the demand-supply
rule, dollar depreciated against other global currencies. This weakness is also
reflected by the dollar-index chart.
Weak dollar
helped Indian rupee to appreciate against it.
(2) Increased capital
flows in India: Indian government once
accused of policy paralysis came up with a slew of economic reforms which
restored the global investors’ confidence in India-story and foreign capital started
flowing in aggressively . Dollar funds inflow fortified the Indian rupee (again according to
demand and supply rule).
(3) Heavy dollar
selling by exporters: Surging rupee spooked
exporters and other dollar hoarders and they oozed out dollars fearing value
erosion.As rupee gets
stronger rupee-value of dollar-fund diminishes and due to this dollar-hoarders sell it.
(4) Falling crude prices: Diminishing crude prices ensured reduced dollar outflow and lower
current account deficit resulting in stronger rupee.
(5) Due to Past Government measures: Imports of Gold, silver and crude expend lots of dollars. To curb the
outflow of dollars, Government had hiked the import duty on gold and silver. Higher
import duty discouraged the imports to some extent and helped rupee to
strengthen.
Besides this RBI had curbed the currency speculation by withdrawing the
facility to cancel and re-book the forward contracts by residents and foreign
investors.
These earlier steps too seem to be showing their effects.
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