Solving the riddle of Rupee:-

As rupee pierces 65/$ and continues to struggle… every one of you must be aware of it but what are its reasons? Why is it falling? What are the reasons behind it?

Let’s start from the beginning As Money is the value assigned to a commodity, a piece of paper, a coin or electronic data (think online banking and credit cards). It is similar to barter system, except commodity used is widely accepted and can be easily handled.

But here comes the hard turn, Money is not an organic matter, its value keeps on changing each day, each hour, each minute and that too each second.1 Rupee in 1947 is different from now in both terms of appearance and purchasing power.The value of country’s currency is directly linked with its economic conditions and policies.
“"The value of a currency depends on factors that affect the economy such as imports and exports, inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital, commodity prices and geopolitical conditions," says Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India), a foreign exchange brokerage.”

1.     The first factor the basic factor for this fall is INCOME LEVEL.
As the income level of a country increases, people spend more. As a result high demand of imported goods increases the demand for foreign currencies and thus weakens the local currency.


“A country that sells more goods and services in overseas markets than it buys from them has a trade surplus. This means more foreign currency comes into the country than what is paid for imports. This strengthens the local currency," says Kishore Narne, head, commodity and currency research, Anand Rathi Commodities, a brokerage house”

2.     Difference in interest rates of countries.
Let us consider the latest RBI move to change interest rates on saving deposites and fixed deposits of NRIs. This move of RBI was a part of steps required to stabilize the Rupee. By allowing banks to increase rates on NRI rupee accounts and bring them on a par with domestic term deposit rates, the RBI expects fund inflows from NRIs, triggering a rise in demand for rupees and an increase in the value of the local currency.

“Some ways through which RBI controls the Rupee are relaxation or tightening of rules for fund flow, changes in interest rates, tweaking the cash reserve ratio (the proportion of money banks have to keep with the central bank) and selling or buying dollars in the open market," says Brahmbhatt of Alpari.”

       3.     Inflation.
Suppose Central bank of a country increases money flow in economy by 4% while economic growth is 3%, this difference causes inflation. In such case, loan repayments will be a lesser burden if interest rates are fixed, as you will pay the same amount but with a lower valuation.

“A fall in purchasing power due to inflation reduces consumption, hurting industries. Imports also become costlier. Exporters, of course, earn more in terms of local currency.”

4.     Minting

Would there be a world where money grows on tree’s instead of leaves…It would sound like a dream come true. As money is printed by governments they cannot print all the money they need. When government prints money to meet its needs without the economy growing at same pace the result can be catastrophic. You can understand it with an example of Zimbabwe.

“After the 1990s land reforms in free Zimbabwe, farm production and manufacturing declined drastically. However, the government continued to print money for its expenses. Zimbabweans started losing faith in the local currency. As inflation surged drastically, the Zimbabwean dollars were printed in denominations as high as 100 trillion. After the currency lost its value, people started using US dollars. In April 2009, the country put its currency on hold and switched to US dollars.”

 5.     Behind the Scene:- Conclusion

“As now you know the reasons behind fall of Rupee or any local currency. And Rupee continues to fall from last few months. RBI is taking the necessary steps to stop this fall.

“"Rising fiscal deficit and untameable inflation were behind the fall in the rupee. As India runs a large current account deficit, it needs a constant inflow of dollars, which was not there. High oil prices inflated the import bill and resulted in further widening of the current account deficit, which accelerated the rupee fall," says Narne of Anand Rathi. ”

“"The decision by the government to allow foreign investors to directly invest in Indian equity could bring some capital flows and have a positive impact on the economy and the rupee," adds Narne. ”