Causes and effect of free fall of rupee against dollar
Causes-:
1) Anticipation of Tapering o¬f quantitative easing from US federal bank.
2) During recession US Federal bank decided to give stimulus to economy thus infusing truck load of cash in market at very low interest rate,this cheap money found it's way in emerging markets like India(because intrest rates in US were low investors were not getting enough return on their investment) where it got good returns.
3) But now prospects of return on investment has become better in US so all the cheap money(dollars) which came in India during recession is going back to US because now they can fetch better returns there.(Demand of dollar increases and it's value goes up)
4) Syrian crisis has been an addon to this situation ,but how?
If US plans to attack Syria than it would be requiring truck load of money to carry out it's operations,what will the government do?..it will issue bonds with higher return rates so people will start buying these bonds instead of investing in markets like India,inflow of dollar in India will again take a hit and rupee will decline more.Moreover US will demand more oil to carry out it's operations and supply will take marginal hit (Syria is marginal exporter of oil) so prices of crude oil in world market will sore(demand increases sharply and suppply takes a hit).
5) Policy bottlenecks -: time and again we hear that govt has increased FDI cap in this sector and that sector but merely increasing the cap will not result in coming of actual FDI,and we rank deep in list of nations in respect of ease of doing business.A reason why investors are not investing there dollars in India.
6) Huge demand of crude oil and gold , the demand of dollar rises to buy them and rupee takes a hit subsequently widening the Current Account Deficit.
7) Export of Iron ore from the mines of Goa and Karnataka has been stopped because of Supreme court order to stop mining in these areas.(Dollar inflow takes a hit)
Effects of sinking rupee against dollar
1) Imports (major oil) becomes costly ->transportation cost of products increases ->commodities price increases specially of food.
2) A major setback for import dependent industries,subsidy burden on govt will increase (like urea will come costlier and govt will still provide it at same rates).
3) Our most power plants are coal based and thanks to inefficiency of coal India and environment regulations we have to import a significant amount of coal from countries like Australia => coal price will shot up=>power generation willl become costlier.
4) Foreign investments(mainly FII) will be effected (is explained in detail later)
5) Worsen the already unsustainable Current Account Deficit.
Few pros of sinking rupee.
1) Good for exporting companies like software firms ,BPOs etc(but that too in short term because for bidding new projects there will be high uncertainty if rupee is volatile which will harm in long run)
2) It will incentivise export orianted manufacturing companies encouraging them to expand.
3) FDI will be more luring as profit margin will increase.(How?...explained below)
Effect of all this on Foreign Investments.
Foreign investments are of 2 types -: a)FII and b)FDI
If A foreign investor has done an investment on which he gets a fixed return in fixed time periods(most FIIs are like this) than the value of his return will decrease (suppose on 10th september 1$=1re and on 11th september 1$=2rs then if return on his investment was 1re than on 1st september he was getting 1$ but next day after depreciation he gets 0.5$ because the return in rupee term is same that is 1re but it's value with respect to dollar has declined)
If a foreign investor invest in FDI or in broad terms if he sets up a plant in India and start manufacturing something, or take the classic case of Walmart ...before rupee depreciation Walmart had to spend more dollars in it's operations but after depreciation it has to spend lesser dollars but one should keep in mind that if Walmart is taking it's profit back to US then it will not give it any benfit because of the same reason that it's profit vaue will also depreciate but if instead of taking back it's profit to US,Walmart invests in it's operations going on some other country says Singapore,Malayasia or any other nation whose currency has not appreciated against rupee as dollar then this transaction will accrue profit to Walmart.
Full name Nikhil Sharma,
Causes-:
1) Anticipation of Tapering o¬f quantitative easing from US federal bank.
2) During recession US Federal bank decided to give stimulus to economy thus infusing truck load of cash in market at very low interest rate,this cheap money found it's way in emerging markets like India(because intrest rates in US were low investors were not getting enough return on their investment) where it got good returns.
3) But now prospects of return on investment has become better in US so all the cheap money(dollars) which came in India during recession is going back to US because now they can fetch better returns there.(Demand of dollar increases and it's value goes up)
4) Syrian crisis has been an addon to this situation ,but how?
If US plans to attack Syria than it would be requiring truck load of money to carry out it's operations,what will the government do?..it will issue bonds with higher return rates so people will start buying these bonds instead of investing in markets like India,inflow of dollar in India will again take a hit and rupee will decline more.Moreover US will demand more oil to carry out it's operations and supply will take marginal hit (Syria is marginal exporter of oil) so prices of crude oil in world market will sore(demand increases sharply and suppply takes a hit).
5) Policy bottlenecks -: time and again we hear that govt has increased FDI cap in this sector and that sector but merely increasing the cap will not result in coming of actual FDI,and we rank deep in list of nations in respect of ease of doing business.A reason why investors are not investing there dollars in India.
6) Huge demand of crude oil and gold , the demand of dollar rises to buy them and rupee takes a hit subsequently widening the Current Account Deficit.
7) Export of Iron ore from the mines of Goa and Karnataka has been stopped because of Supreme court order to stop mining in these areas.(Dollar inflow takes a hit)
Effects of sinking rupee against dollar
1) Imports (major oil) becomes costly ->transportation cost of products increases ->commodities price increases specially of food.
2) A major setback for import dependent industries,subsidy burden on govt will increase (like urea will come costlier and govt will still provide it at same rates).
3) Our most power plants are coal based and thanks to inefficiency of coal India and environment regulations we have to import a significant amount of coal from countries like Australia => coal price will shot up=>power generation willl become costlier.
4) Foreign investments(mainly FII) will be effected (is explained in detail later)
5) Worsen the already unsustainable Current Account Deficit.
Few pros of sinking rupee.
1) Good for exporting companies like software firms ,BPOs etc(but that too in short term because for bidding new projects there will be high uncertainty if rupee is volatile which will harm in long run)
2) It will incentivise export orianted manufacturing companies encouraging them to expand.
3) FDI will be more luring as profit margin will increase.(How?...explained below)
Effect of all this on Foreign Investments.
Foreign investments are of 2 types -: a)FII and b)FDI
If A foreign investor has done an investment on which he gets a fixed return in fixed time periods(most FIIs are like this) than the value of his return will decrease (suppose on 10th september 1$=1re and on 11th september 1$=2rs then if return on his investment was 1re than on 1st september he was getting 1$ but next day after depreciation he gets 0.5$ because the return in rupee term is same that is 1re but it's value with respect to dollar has declined)
If a foreign investor invest in FDI or in broad terms if he sets up a plant in India and start manufacturing something, or take the classic case of Walmart ...before rupee depreciation Walmart had to spend more dollars in it's operations but after depreciation it has to spend lesser dollars but one should keep in mind that if Walmart is taking it's profit back to US then it will not give it any benfit because of the same reason that it's profit vaue will also depreciate but if instead of taking back it's profit to US,Walmart invests in it's operations going on some other country says Singapore,Malayasia or any other nation whose currency has not appreciated against rupee as dollar then this transaction will accrue profit to Walmart.
Full name Nikhil Sharma,
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