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Over the last few months India’s growth has slowed down. One of the clearest indicators of this is the falling value of the Indian rupee. With the financial crisis in Europe at its peak, foreign direct investment (FDI) into the country has fallen steeply. This has increased India’s trade deficit. While the value of goods being imported into the country is as high as ever, Indian exporters are finding it difficult to sell their goods in the weakened International market. As a result while few people are selling dollars to buy rupees, many of them are selling rupees to buy dollars. Thus the value of the rupee is depreciating.
Also with the oil companies demanding to be paid in dollars, the Indian government is forced to shell out a higher price (in terms of rupees) to buy crude oil leading to the petrol price hike in the country and the widespread resentment against the Indian Government. With the increase in transportation cost associated with this rise in petrol, Indian manufacturers are faces with increasing operational costs further impacting the export market. This is also a major cause of the widespread economic inflation in the country. At the same time, BPO’s, NRI’s and others who are paid in dollars are enjoying a greater income and thus profiting from this scenario.
The Reserve Bank of India is trying it’s best to arrest this fall by selling dollars and buying rupees. It has also increased the maximum limit on foreign direct investment recently to try and reduce the trade deficit. However, with the investors wary of investing money into risky markets after the Greek fiasco, this step is unlikely to yield results in the near future. Though the RBI has been pretty laid back till now, Experts are hoping they will bring implement some major policy changes in the near future which might help strengthen the rupee.
Hopefully the government will be successful in its attempts to arrest this fall and the Indian growth story will continue unabated.