Rupee is on a slide and it's sliding fast against all major currencies. This is particularly interesting asnot so long ago (Aug'11) Rs was $45 and RBI was pressured to intervene and sell $ in the open market to relieve the exporters. Looks like we are at the other half of the cycle and it's for RBI to intervene again, albeit this time from the other direction. (I personally don't support the role of central bank as exchange rate stabilizer).
Any ways looking at the sliding Rupee I would like to focus on few things which could have had worked together in past few months to manifest what we are witnessing today.
1. After strong first few months of FII investment in 2012 we are now seeing a dip. The FII investment in the debt market saw net outflow of Rs. 6500+ Crore in the month of March and another ~Rs. 4000 Crore withdrawn in April'12. Similarly, FIIs withdrew from Indian equity in the tune of over Rs.1000Crore in the month of April and their net investment is in negative in the month of May. All this selling has put tremendous pressure on Rupee.
2. Oil, India's biggest import, saw its prices increase again to $100+ level and remained so till end of April'12 which has again put Rs under pressure.
I believe these are the two important factors for the recent drop in Rs. exchange rate. However, there can be other reasons as well including:
1. Inflation: Gov. has struggled to put prices under control and continued periods of high inflation is bound to put pressure on the exchange rate.
2. RBI has been forced to loosen monetary policy but at inflation still at 7+% plus recent hike in petrol prices can push the inflation up again eroding the value of investors.
3. As the aftermath of financial crisis refuses to subside and in the wake of rekindled Greece crisis investors are looking for safer bets.
