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Thursday, January 19, 2012

How rupee shored up against the dollar?



Indian rupee which once almost touched the 54-level against the US dollar, has presently trading in 50-51 range and was at its 2-month high.
Forex market analysts were expecting it to touch 56-57 level. I had discussed the reasons for the depreciation of Indian rupee in one of my previous post.
What is intriguing to know is how the depreciation of the rupee was tamed.

Let’s delve a little for reasons responsible for this miracle-
·        
      Importduty on precious metals like gold and silver almost got  doubled as government now charge it on the transaction value in contrast to the fixed duty as per weight earlier. Higher import duty results in lower import and thus curtailing the dollar outflow from the economy.
·         Though late but RBI intervened and took some effective steps to capture the Indian rupee’s fall against the US dollar. RBI deregulated the interest rates on various NRI (Non Resident Indian) deposit schemes. As interest rates in India are much higher in comparison with the same in countries like USA, more and more NRI money (mainly in Dollars) entered the nation and stabilized the falling rupee.
·         One more step from the RBI was the strict implementation of curbs on speculation by withdrawing the facility to cancel and rebook forward contracts by residents and FII’s (Foreign Institutional Investors).
·         Lots of FII money was flown-in into debt and equity. Indian debt instruments fetch much more return than US treasuries and other nation’s treasuries. This lucrative return brought foreign money in India and rupee recouped its fall.
·         As food inflation lowered, the hope that inflation has topped and RBI might reduce policy rates in coming days, enthused the FII’s which went on buying spree in the Indian capital market. Lower interest rates ensure better profitability of companies especially of interest sensitive ones. With rising inflation RBI had raised the policy rates for 13-times in the row.
With falling inflation RBI is supposed to lower the policy rates which results in cheaper credit for the businesses. 
All these aforesaid reasons are preventing rupee from further depreciating against the dollar.

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