Do you know Why the Rupee is falling down?
Compared to the previous year rupee has dropped 26% against dollar. And this year last three months rupee has dropped nearly 12.6% closing at 57.15 on 22/06/12 last Friday. Rupee has not fallen like this even during the recession came on 2008. Rupee react to both fundamental and technical side. Fundamentally the sentiment is down. We received bad news on economy,GDP growth, policy downgrades, S&P down downgrade ratings, drift rating, high inflation, lack of rate cuts.
Another three reasons for main fall is Oil demand, High hedging cost, Bunching Payments. Many of them aware about Oil demand but not about other two. Here explained the same.
OIL DEMAND : India imports nearly 83% of oil requirements and and every year it pays $150billion it is the main reason which rupee under pressure. India imports Gold and previous year paid $60billion for gold imports. Whenever the oil price lower oil demand and the price fluctuates. A $1 decline in oil prices should help reduce current account deficit by about $1 billion.
Importers are increasing their credit period for the payments which they need to import for oil or any other commodity. Usually they pay every 2months once but now it goes for 3-6months so panic and pressure on rupee is more and we expect to touch 60 very soon.
HIGH HEDGING COST : The cost of hedging through one year forward contract is high. As per RBI rate cuts was not done and it remains stable without any change its also the reason for high hedging cost. The forward premium was as high as 6.6% as few weeks ago before falling 4.83%.
BUNCHING PAYMENTS : Bunching of payments by oil companies in the spot market has increased demands for dollar in short term. At present they receive a credit of 3-6 months for importing. It creates more pressure for rupee to get very freely.