Rupee Falling Pros and Cons

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Rupees pros and cons The depreciation of rupee has been the major news of the week in the media. This depreciation of rupee in exchange for dollars in the foreign currency market raises two crucial questions, one why it is depreciating and the second what is its impact on the macro economy. The foreign currency market is a free market in which the exchange rate of currency depends upon supply and demand. This system had been adopted in 1973 which brought a shift from previous fixed exchange rate to floating exchange rate. The value of the currencies — dollar and rupee — depend upon demand and supply of either currency. The current depreciation of rupee is the result of the increase in the demand for dollars. There are two factors which have been contributing for the increase in demand for dollars, the current account deficit and the outflow of F11s capital investments. These two factors are related to the present financial crisis. The major export markets for us are United States of America and euro zone countries. The US economy has not fully recovered from the crisis in spite of trillions of dollars bailout package. Unemployment in the US is close to nine per cent and its GDP is expected to grow only by two per cent. Same is the situation in European countries and England. Countries like Greece, Italy, Spain, Portugal and Ireland are mired in sovereign debt crisis. These countries are trying to implement IMF-dictated austerity measures. As a reset India’s exports have been declining where as imports bill has been rising. In a clear sign of the euro zone sovereign debt crisis impacting the Indian economy, growth in exports slipped to a mere 10.8 per cent at 19.9 billion dollars in October this year, the lowest increase since the same month in 2009 when it contracted by 6.6 per cent. In sharp contrast, imports grew at a much faster clip at 21.7 per cent to 39.5
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