there are a whole host of issues that are playing out right now that have pushed the INR lower. firstly, lets not see the INR in isolation from developments across continents. worries emanating from the euro zone have impacted not only the INR but also other currencies - the euro fell nearly to four month low, the australian dollar was down to five month low, while the kiwi dollar also hit a four and 1/2 month low.
secondly, the flight of capital recently has been a fallout of negative perception of the tax proposals that are likely to be enforced from this fiscal. the concerns are with respect to taxation of indirect transfer of shares (china has already introduced a a circular with retrospective effect to tax such transfer and various other jurisdictions also have similar provisions) and with respect to GAAR provisions for checking tax evasion.
some experts also argue that the sell off in indian equities and currency is more a lobbying tool by big ticket investors, fearing falling into the tax net than an actual rethink on indian investments.
With the govt having taken the tough measures with respect to taxation (and with the DTC likely to come into effect from FY13-14) we can expect some fiscal consolidation and better management of the deficits.
Besides, economists have expressed confidence in forex reserves with the RBI coming to the rescue. calculated selling of dollars will help cushion the blow, thereby helping the country avoid hyperflation.
one could also argue, i guess, that with global growth slowing down (including china) and the stand off between Iran-US simmering down - crude prices could see a downward move helping net importers of oil like india save on precious dollars. which in turn could help lower inflation, allowing for a loose monetary policy enabling greater investment and growth.
in summary, a dying indian economy - is only a wet dream.
