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Currency Depreciation – a concern for the Indian Economy

The Indian Rupee has marked a significant depreciation against the US dollar marking a new risk for Indian Economy. Till the beginning of the current financial year very few had ever expected Rupee to depreciate to so low levels. On October 21, 2011, the rupee crossed Rs. 50/$ for the first time this year touching new lows of Rs.53.72/$ on 14th December 2011. What is even more interesting to note is that when other countries are trying to keep their currencies devalued, India is trying to prevent depreciation of its currency.
As Indian currency has sharply depreciated not only against the US dollar, but also against the other currencies of the world, a myriad of factors can be associated with this devaluation of this currency. There are supposedly four factors behind the recent scenario: * Flight of foreign funds from the Indian market. * Slowdown in the capital inflows. * Higher global crude oil prices, which widens the current account deficit and also increase dollar buying by oil companies. * Recovery of US dollar.
As the downbeat forces have played strong over the last few months, investor risk-appetite has contracted, thereby increasing the demand for safe haven such as US treasury, gold and the greenback. Secondly a prospective decline in inflows on the capital account of the balances of payments could further be associated with the depreciation in rupee.
The most possible impact of the devaluation of currency could be the stimulation of merchandise exports. Commodities like textiles, leathers and handicrafts sectors, which were, till recently suffering due to appreciation of rupee are now sighing a huge relief. According to Industry estimates, about 25% of order books right now are due to currency advantage Indian companies are enjoying over the other countries like China. So,…...

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