Saturday, November 19, 2011

Foreign Exchange : Checkmate for India

In the vast pool of foreign exchange, where trillions of dollars exchange hands daily; the Indian currency is loosing its sheen. Thanks to the increased demand of both USD and Euro, the Indian currency is hovering strongly around Rs.50 against dollars for more weeks than ever before. So what does this mean to our economy. As India is a more import oriented country with imports contributing 80 % to GDP and remaining 20% by exports. The weakening of the currency means increase in the cost of importing these goods. The most visible of these is the steep rise in the petroleum products whose northwards march will be inevitable if the current trend continues. And for exports it will be more of a gain as they will be earning more for their services and mostly the IT and ITeS sectors will be at major gains as they form the backbone of the exports in India.
The falling tale of Indian Currency 2011
The rupee has plunged 14 per cent this making it the world's third-worst performing currency after the Turkish Lira, which is down 17 per cent, and the Kenyan Shilling that has lost 15 per cent. It is the worst performing Asian currency and the worst among all G- 20 countries.
Since there is more loss than gain in this trend some are criticizing the RBI's decision of non-interference till this level and argue that the threshold has been reached for RBI's action. It will be curious whether RBI will interfere or not in the coming weeks.
What can RBI do ?
RBI can ask the banks to release the reserve dollar so that the demand will be curtailed and the rupee can further strengthen. But these measures will be taken as a lost resort.But now it is just wait ad watch for both RBI and traders.

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