Wednesday, December 14, 2011

Impact of weak Indian currency



The rupee’s depreciation against the dollar is seen to be beneficial to the Indian economy in some ways, and detrimental in other ways. The rupee fell to 53 against the dollar, its weakest in nearly 2 years, early on Wednesday as worries Europe could be heading for another banking crisis rattled global markets. Let us quickly analyze theimpact of Weak Indian currency on different institutions.


Impact on Inflation

Weaker rupee complicates government’s battle against runaway inflation. Imports become more expensive. The dramatic dip in rupee’s value has a very bad impact on the economy. While many currencies have been weakening against the dollar, India has been the worst performer in Asia. With the increase in dollar rate, the rupee remains weak & Indian imports of Crude Oil, edible oil, pulses & Capital goods becomes more expensive.  The rise in dollar rate adversely impacts government’s efforts to curb inflation.


Impact on FII inflows

The focus is particularly on crude oil price. Due to the Financial market turmoil, foreign capital inflows have almost dried up, but the demand for Dollars is rising. India’s crude oil import bill has become staggering. Due to rise in the Crude Oil Price, the Oil Marketing companies are shelling out 40/50 dollars more/barrel. Hence there is an increase in the Dollar demand, which have been almost sucked.