Rupee’s value against dollar will be one of the key factors which will decide the shape of Indian economy in the New Year.
Last year’s trade features tells that why the rupee is not going to have it easy in 2012, the ride could get rough. Last year the trade gap has increased to $ 133.3 billion, though our export has increased at 25.8% but import has also grown 30.4%. We are consuming more which we import and producing less which we export and this trend is accelerating, this is also one of the reason of high demand of dollar, our foreign exchange reserves has fallen to $ 2935 billion.
Though it may be argued that why can’t we decrease our imports ,I think it can’t be decreased because it is very essential to our growth and if we do so it may give the rupee another chance to decline .
The rupee movement also depends on the European crisis that how it unfolds and capital flows into the country because the crisis in Europe led to a loss of confidence in the Euro, resulting it depreciated against dollar, this has also led to the dollar’s appreciation against other currencies including rupees ,and as things stands now there are no signs of resolution in European debt crises ,so the demand for dollar will remain high and it will have negative impact on rupee’s value in the coming year.
Other things like government policies may also lead the rupee depreciation further because government has declined the proposal for FDI in multi brand retail, and in aviation, and these policies will have direct impact on capital inflow in the country.
The government is also planning to borrow more ,earlier in budget 2011 government forecasted 4.6% fiscal deficit but now analysts expect that it will go up to 6% of gross domestic product, and this would pressurize the central bank to print more money to fund government’s borrowing ,it eventually hurts the rupee because the supply will increase .
Though RBI is taking measures to strengthen rupee, it has hiked rates 13 times to check inflation. However, this has not helped rupee in any ways .RBI is constantly taking steps to curb speculative foreign exchange and allowed banks to set interest rate on NRI’s savings and fixed deposits but this step didn’t leave any impact on demand and supply of dollar.
So in near future the path for rupee does not look smooth, the rupee may have rough ride in 2012
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