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Monday, October 1, 2012

How Rupee is recovering against dollar?



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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