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Why the rupee is falling against the dollar

September 23, 2008

The main reasons behind the fall of the rupee are an increased demand for dollars due to a spurt in crude oil prices and the flight of foreign funds from the Indian market. Demand for rupees, simultaneously, has dipped because capital inflows are down.

  • The American sub-prime crisis that shook the global financial markets has seen unprecedented bailouts and infusion of dollars into the US economy. This infusion has been at a cost of many an emerging market, from where funds have been pulled out to plough back into America. India has been one of the worst hit countries on this count, as foreign funds took flight, thereby making dollars scarce. The sudden and colossal demand for the US greenback has seen it strengthen, while the rupee's exchange rate has depreciated dramatically during the same period.
  • India's stock market regulator, the Securities and Exchange Board of India, has said that foreign investors sold more Indian shares than they bought.
  • Global funds are said to have sold Indian shares to the tune of over $9 billion more than they have bought this year. As demand for dollars from importers increased and the US Treasury poured in almost $700 billion into the US economy to bail out drowning financial giants, the Indian market saw an outflow of a huge amount of dollars leading to a spurt in the dollar price against the rupee.

    Image: A member of the counter staff at a foreign exchange centre in Mumbai counts US dollars. | Photograph: Sebastian D'Souza/AFP/Getty Images

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