Thursday, March 5, 2009

Indian Rupee Weakening!!


Not only Indian currency, all the Asian currencies are going down. They have started to doubt their strength.

If we compare the rupee with dollar it has come down at their 2 year low. The declining rupee is affecting the economy. Indian companies are losing huge chunks money. Many companies have recorded mark to market losses running on their foreign currency liabilities.

Using the Keynesian Graph, the demand-supply curve shows a very high demand of US$ but a limited supply is available leading to higher price of Unit Dollar present thus weakening the Indian Rupee.



In this graph Demand and supply both meet at a lower margin indicating a lesser requirement of $ in that economy. This means "An economy having a lower margin with Dollar has a stronger currency making and demand of $ lesser in such an economy".

In this graph the demand is more depicting a weaker currency with a huge demand of $ to satisfy its internal working structure.
This case aptly corresponds to India.

So as to strengthen Indian Rupee, Reserve Bank of India(RBI) has started to sell dollars but it is not making any difference. Demand of dollar is so high that it is not easy to control their appreciation. Oil companies have to make their payment in dollars. They are making huge demand of dollar.


The impact of weakening rupee share market is also in turbulence. Investors have started to think on strength of the economy.


It is still unclear, when this weakness will come to an end. But this is not an indication of a strong economy. People are in hope that it will take some time to be settled down.

3 comments:

Ankit Poddar said...

the indian rupee is weakening and while that may be true, i disagree with the statement you have put up saying that all indian companies are suffering

while oil is suffering, IT companies have finally got something to cheer about.

and from news reports in today's TOI, a large of corporates have sold their dollar stacks, arresting the free fall of INR.. giving it a boost of 65 paise.

this on the other hand also proves that other than RBI and foreign institutes, a large number of Indian corporates are also hoarding dollars, may be to enjoy credit arbitrage! i dont know that why now!

Divine Interception said...

Ankit,

I agree with ur point on Credit Arbitrage..
But it is nothing but sheer Hedging.
This was the same case which happened in 2001, the great depression. And still we are not ready to understand the implications.

IT companies will never suffer in their agreements as all payments till now are in US$.
But when it comes to outsourcing and ADR status they have been seriously damaged.

Infosys has shown a record erosion of more than 1.5bn $, nearly 20% of total company revenue..

Other left points will be justified in next post.

Shaurya Srivastava said...

Bhai log.....Your comments i really didn't get much......I really need to read a lot!!!.....But the post was very clear and well written for people like me who rarely understand such stuff....Good one Vinit!!! Keep writing such simple posts which appeal to masses and easily understandable to 'illiterate in economics' like me....Well done!!!