shree835
BANNED
- Joined
- Jun 26, 2010
- Messages
- 3,005
- Reaction score
- -19
- Country
- Location
What causes the rupee’s exchange rate against the dollar to fluctuate? It is simple – demand and supply. An increase in the demand for US dollar means it is more valuable than the rupee. If the supply increases, the value falls.
This is why external factors matter. They cause traders and investors to buy or sell a currency.
Here are three factors that may help the rupee remain stable:
• Current account deficit: CAD was the key reason why the rupee fell to 69-to-a-dollar levels. A current account deficit is when a country’s payments to other nations exceed the amount it receives. In India, a high deficit is because of our dependence on imports – especially oil and gold. This has a direct impact on the rupee. As the payments to other countries are in foreign currencies, rupees have to be sold. An increase in selling subsequently leads to a fall in value. In the last five years, India’s current account deficit rose more than 10-fold.
The government then announced large-scale measures to curb imports of gold. This led to the CAD fall more than half in 2013-14 to $32.4 billion from the record high of $87.8 billion in 2012-13. When compared with the Gross Domestic Product (GDP) – a measure of the economy, the CAD fell to 1.7% of GDP from 4.8%. This is likely to narrow further to $28.3 billion in FY2014-15, according to a report by Kotak Securities. The rupee, as a result, may stabilize in the 57-61/$ range, the report added.
• Foreign fund inflows: As a foreigner, when you invest in India, you sell dollars and buy rupees. For this reason, an increase in fund inflows has a positive impact on the rupee’s valuation. Fund inflows – measured by the country’s capital and financial account – increased in FY2013-14, especially in the second half. Overall, India had a capital and financial account surplus of $48.8 billion in FY14because of RBI measures to attract foreign currency deposits as well as the return of foreign investment.
With the formation of a strong and stable government at the centre, fund inflows are likely to continue in FY15, according to a report by ICICI Bank. This will help support the rupee, which may touch 58-to-a-dollar levels, the report added.
• Increase in forex reserves: The RBI regularly sells or buys dollar to control the rupee in case of volatility. These dollars come from its forex reserves. The RBI has been shoring up its forex reserves. In 2013-14, reserves jumped four times to $15.5 billion from $3.8 billion in the previous year due to the inflows from capital and financial accounts, as per RBI data. This increase in forex reserves gives the central bank greater ability to intervene in the market to control the rupee.
Why rupee stopped falling - Yahoo India Finance
This is why external factors matter. They cause traders and investors to buy or sell a currency.
Here are three factors that may help the rupee remain stable:
• Current account deficit: CAD was the key reason why the rupee fell to 69-to-a-dollar levels. A current account deficit is when a country’s payments to other nations exceed the amount it receives. In India, a high deficit is because of our dependence on imports – especially oil and gold. This has a direct impact on the rupee. As the payments to other countries are in foreign currencies, rupees have to be sold. An increase in selling subsequently leads to a fall in value. In the last five years, India’s current account deficit rose more than 10-fold.
The government then announced large-scale measures to curb imports of gold. This led to the CAD fall more than half in 2013-14 to $32.4 billion from the record high of $87.8 billion in 2012-13. When compared with the Gross Domestic Product (GDP) – a measure of the economy, the CAD fell to 1.7% of GDP from 4.8%. This is likely to narrow further to $28.3 billion in FY2014-15, according to a report by Kotak Securities. The rupee, as a result, may stabilize in the 57-61/$ range, the report added.
• Foreign fund inflows: As a foreigner, when you invest in India, you sell dollars and buy rupees. For this reason, an increase in fund inflows has a positive impact on the rupee’s valuation. Fund inflows – measured by the country’s capital and financial account – increased in FY2013-14, especially in the second half. Overall, India had a capital and financial account surplus of $48.8 billion in FY14because of RBI measures to attract foreign currency deposits as well as the return of foreign investment.
With the formation of a strong and stable government at the centre, fund inflows are likely to continue in FY15, according to a report by ICICI Bank. This will help support the rupee, which may touch 58-to-a-dollar levels, the report added.
• Increase in forex reserves: The RBI regularly sells or buys dollar to control the rupee in case of volatility. These dollars come from its forex reserves. The RBI has been shoring up its forex reserves. In 2013-14, reserves jumped four times to $15.5 billion from $3.8 billion in the previous year due to the inflows from capital and financial accounts, as per RBI data. This increase in forex reserves gives the central bank greater ability to intervene in the market to control the rupee.
Why rupee stopped falling - Yahoo India Finance
