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Rupee Depreciation a dilemma!
Mon, 15 Apr Pre-Open

Rupee has depreciated by approx 7% in last one year, to the current level of Rs 55 per US dollar (USD). However, it may not be done yet. As per an article in Economic times, rupee's fall to Rs 60 per USD in the near term is well within the realms of possibility. Here are the reasons as to why the rupee can continue to depreciate.

As per the data reported, foreign institutional investors (FIIs) are showing some disinterest in Indian markets lately. Sluggish economy and recovery in stock markets of developed economies like US and Japan are believed to be the key reasons. Since FIIs inflows have played important role in keeping rupee at current levels, an intense selling activity by them does not augur well for the near term direction of the rupee.

Further, consistently high inflation has resulted into Indian goods becoming expensive in the global markets, thus making it less competitive, especially when compared to goods from China. Thus, rupee may have hardly any support by way of higher exports. Lastly, gold imports, another key reason why the deficit is high and rupee under pressure, may not slow down in a hurry.

Thus, these factors combined could keep up the pressure on the rupee and if things take turn for the worse, take it all the way to Rs 60 per US dollar.

On the positive side though, crude prices could be the big joker in the pack. They are already down over the last one year and if they weaken some more, it could certainly act as a release valve for the Indian rupee.

Having said that, we cannot always rely upon external factors if we are to make our currency competitive from a long term perspective. What we need are structural reforms that would boost our export competitiveness and help us achieve energy security. Only then we can really be free from this constant worry about what FIIs are doing and how crude prices are behaving.

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