We all know about recession and it is worse in US and better in India as compared to US, then how come dollar

is appreciating with respect to Indian rupee? Don't you think that Indian rupee should go up and US dollar should move down REASONS

First Reason - Dollar is in Demand BRIC countries like India have emerging economy, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing and many of them are on the verge of breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong on all statements, so to recover losses in their country, they are pulling out their investments from India. Due to this pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is raising up and rupee is depreciating. There was a huge interest rate differential between India and US. Now RBI is reducing all kind of rates to increase money supply in market, so deposit rates will also move downwards. It will reduce the rate differential between two countries and affect the fixed investment in India in a negative manner. Second reason - Collapse of International Trade If you observe in terms of international trade, commodity prices are crashing at international level.Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand is increasing against the rupee. This has not happened yet due to lack of confidence in all kind of markets.Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby decreasing demand for rupee.

The following are the three major factors influencing the changes in the currency values. There are many other factors too, but we are not talking about all the factors in this section.

Inflation o As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies

Interest Rates o A higher interest rates offer good returns compare to other countries. It will result in the foreign capital come into the country. Lower interest rates decrease the currency value. Note that interest rates has the close relation with interest rates. The currency value would not be affected only based on the interest, it is impacted based on the other conditions like inflation or economic situation. Current Account Deficits o Basically current account of a country presents the status on the trade of a country between other trading partners. If there is any deficit in the current account, that means country is doing more trading outside the country then its actual earning inside the country. This situation is not good for a country because the country needs to buy more foreign currency to fulfill its need inside the country. A country needs to manage its deficit within control, otherwise it will lead to a economic problem. More demand for the foreign currency would reduce the value of that countrys currency.

Impact of INR vs USD

In the last two weeks Indian rupee has depreciated about 7% against the USA dollar value. It is expected that it would continue the slide as many macro economic factors not in favor of Indian economy. The following are the factors which would slide down the rupee value.

Foreign Funds Outflow o It is the major concern of Indian economy now. Because of the global uncertainty and various economy crisis like Europe sovereign debt problem, US economy problem, etc leads to search for the safe heaven among the investors. They are quickly pulling out the money fro Indian market and investing in any other safe investments like Gold or US dollar. Government Deficit is High o The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10 per cent of GDP. It is high deficit and investors lost faith in the local economy. Political Uncertainty and Corruption o This is one of the major factor for any country to stabilize the economy. In India, last one year we are seeing the series of corruptions and there is no good news from the ruling party (Congress) about the economic reforms and lot of agitation among the citizens including the veteran Gandhian Anna Hazares campaign of Fight for Second Freedom which took attention from global media. India needs political change to gain confidence among the investors.

1. Why is the Rupee Depreciating So Badly? Because of many factors that are occurring in a simultaneous fashion. The crucial ones are: 1. Due to Risk Aversion on the part of Currency Investors, the Demand for the US Dollar has gone up world over 2. Uncertain Economic Situation around the globe 3. FIIs turning Net-Sellers and withdrawing funds from the Indian Market 2. In 2008, we saw a similar/drastic Rupee Devaluation against the USD. Is the current scenario similar? Well, not really. Last time around, the devaluation was driven mainly by rise in Oil Prices. The price of oil reached USD 147 per barrel and was one of the key contributing factors. However, Risk Aversion was also a part which affected the value of the Indian Rupee. Though the effect is the same, the combination of causes is different. Risk Aversion is the common culprit if you want to identify the common cause 3. Has the Risk Aversion among the Investor Public changed when we compare the times in 2008 to now? The concept of Risk Aversion is the same irrespective of what timeframe you are talking about. But, the current situation is much more riskier & pronounced than what was in 2007-08. Back then, the problem was localized to debt problems (loans & mortgages) in USA and had only a ripple effect across the globe. Right now, the problem is more profound and markets world-over are in a crisis and some countries are on the verge of Default. So, people are much more risk averse than what they were in 2008 and hence the situation is much worse than during the mortgage economic crisis. 4. How long do you think this economic crisis is going to last? Well, frankly speaking I dont know speaking optimistically maybe a year or so. But, as more and more data comes out regarding the mess that the world economies have pushed themselves into, the timeline gets blurred. Practically speaking, nothing major can happen in short term (3 to 6 months). Any recovery can be felt or realized only after a year or so of sustained efforts from governments world over. 5. Could the Reserve Bank done anything to protect the value of the Indian Rupee? Yes, the RBI could have taken steps to protect the value of the Indian Rupee. But, unfortunately they did not. That is why Rupee is dangling at over Rs. 52 per US Dollar. 6. Why didnt the RBI do anything? The Central Bank of any country is entrusted with the responsibility of protecting the value of its home currency. They usually kick into action when they suspect any speculative attack on their currency by external forces (Intentional attempts to devalue a countrys currency) In this case, the devaluation of the Indian Rupee was not due to some intentional attempt by anyone. It was due to the global economic scenario and any steps they take might backfire if the global economic situation worsens. The RBI just let the economy take its course with the exchange rate between US Dollar and Indian Rupee because there was no foul play suspected.

A point to note here is that, the RBI is closely monitoring the situation and may intervene if they feel the depreciation is too much. 7. What can the RBI do to curb the depreciation of the Indian Rupee? They can sell US Dollars. Last time around when there was such a problem, the RBI sold US dollars worth nearly 18 billion. This time around, they would have to cough up an even larger number to prevent the depreciation. Most importantly, this will be only temporary. The RBI selling dollars alone cannot fight the global dynamic risk and hence will not have any long term effect on the exchange rate. That is exactly why the RBI isnt doing anything explicit to protect the rupee value. 8. What do you think the Indian Rupee will value against the US Dollar by next year (2012)? Maybe around 46 or 47 Indian Rupees per US Dollar. To substantiate my claim, if the economic scenario recovers, there will be a lot of FII inflow of funds into India that will give a lot of strength to the Indian Rupee. And hence, it should come down below the 50 rupee mark and settle down between 46 to 48 Indian Rupees per US dollar. 9. Will all IT companys post stellar profits due to the Rupee going down? No. Not really. IT companys in India have the concept of Hedging their foreign exchange income. They usually hedge against a particular value and project earnings/profit numbers for the subsequent quarters. So, the profit they make due to this rupee depreciation may not be as stellar as one might expect, but nonetheless, IT Majors will most probably post impressive numbers this quarter. 10. Will the Indian Rupee depreciate further against the US Dollar? Maybe This is not something that we can predict right away. But, by the look of things it looks like it may go up by another one or two rupees. Maybe 53 or 54 is realistic and possible. 11. If investors take out their investment from European countries to invest in US, would it have any effect on the exchange rate of rupee? Not much. US Dollar investments made in India only will affect the exchange value between US Dollar and Indian Rupee. US Dollar investment in Europe will not affect the exchange rate in India

Just 6 months ago, on 7th June, 2011, the USD INR exchange rate was 44.8001 INR to 1 USD. On 7th December, 2011 the rate was 51.8046 INR to 1 USD. This is a depreciation of close to 16%. Lets take a look at the Arab Emirates Dirham. On 7th June, 2011, it was 12.2073 INR to 1 AED. On 7th December, 2011 the rate was 14.116 INR to 1 AED. This is a depreciation of close to 16% - the same as the depreciation against the USD as is to be expected.

NRIs in the land down under arent left out either. On 7th June 2011, the Australian Dollar (AUD) was worth 48.0032 INR. On 7th December, 2011 it was worth 53.246 INR. Thats a depreciation of 10.92%. The situation is roughly the same with a lot of other currencies. Is this good news for NRIs? Definitely. Heres why. For every USD, AED or AUD or other appreciated currency (for example the Euro, the British Pound, the Kuwaiti dinar have all appreciated against the INR) sent to India, youre getting more bang for the buck. For example, on 7th June, AUD 1000 remitted to India was the equivalent of Rs. 48,003. Yesterday, it was the equivalent of Rs. 53,246. This is why remittances to India have sharply increased in the last few months. Now, as an NRI, you can take advantage of this fall in the following ways: To start with, not only has the INR depreciated, but we are in a period of high interest rates, so NRE and NRO deposits now earn more than they did 6 months ago. Your savings help in your NRE and NRO accounts will now earn you higher interest due to this increase in rates. Current NRO account interest rates for 1 year and thereabouts is in the range of 9.00% to 9.25% at banks such as HDFC Bank and Bank of Baroda. NRO deposit rates at Standard Chartered and HSBC are lower, in the range of 7.75% to 8.25% for the same 1 year tenure. Thanks to the depreciation of the INR, if you have invested in property in India with the help of a home loan, you can prepay more of your loan by sending back just the same amount of EMI each month, as youll be paying more rupees for the same amount of dollars. If you want, you can also consider adding to your real estate portfolio by buying another house. Thanks to the rupee depreciation, homes are increasingly cheaper in dollar terms. However, this of course might not be enough incentive to buy a house. You must also consider the nearness of your other life goals and the availability of surplus funds before making use of the depreciated rupee. Even corporate FDs are currently offering double digit interest rates (with a sweetener for senior citizens) so they make a very good investment avenue for NRIs considering the current depreciated rupee. Corporate FDs such as Shriram Unnati, HDFC Ltd, DHFL and others are offering interest in the range of 9.50% to 10.25% for 1 year deposits. NRIs can invest in these deposits from their NRO account. Conclusion In conclusion, while the time is indeed right considering the depreciated rupee, it is important to keep in mind certain points before remitting additional funds to India, as an NRI: - Consider your investment vehicle carefully. If you are investing in equity because the markets are depressed, try and avoid a lump sum investment. Opt for a Systematic Investment Plan, as we will likely see more volatility in the coming months

- If investing in equity, also consider the time horizon of this investment. When are you going to require these funds? At PersonalFN, we believe that if youll need the funds in less than 3 years, equity is not for you, opt for a high rated corporate FD instead - Are you going to repatriate these funds? Repatriation rules will indicate whether you need to invest from your NRO or NRE account - Keep your taxes in mind. If youre investing in a house property using a home loan, utilize the home loan principal repayment deduction under Section 80C and also the interest repayment deduction under Section 24 to reduce your tax liability on income arising / accruing in India. So keep these points in mind and make the most of the current rupee scenario.

By Aditya Phatak and Shamik Paul MUMBAI (Reuters) - The Reserve Bank of India (Toronto:RBI.TO - NewsRBInull) stepped in to defend its battered currency, which sank to a record low on Thursday, by selling dollars in the market and reducing trading limits for banks. The two-pronged defence came after the currency hit a series of record lows, with investors and officials piling pressure on the central bank to abandon its hands-off approach to the rupee, which ended off an all-time low hit low earlier in the day. The rupee has lost more than 18 percent from a July peak, making it the worst performer in Asia. Weakening economic conditions are expected to keep the rupee under pressure in the near-term, given the central bank's limited means and appetite to prop up the currency. The RBI sold dollars, according to traders, sparking what they said was a slew of stop-losses on long dollar positions by market players who had expected the currency, which had plunged to a record low of 54.30 against the dollar, to hit 55 per dollar. The rupee ended near the day's highs of 53.64/65 per dollar, marginally stronger than Wednesday's close but well above the record low plumbed in early deals. To curb speculative activity in the market resulting from booking and canceling forward contracts, the central bank after market hours reduced the net overnight open position limit or trading limits for banks in the foreign exchange market. "It is a rare market development," said Naveen Raghuvanshi, associate vice president for currency trading at Development Credit Bank. "The message RBI is trying to give is that speculative tendencies have to be curbed and genuine demand-supply should be allowed to move the currency rate." While the central bank does not set a rupee a target, it does step in to smooth currency market volatility and has been doing so in recent months.

The central bank usually intervenes via state-run banks and its intervention came as a surprise to market participants, particularly exporters, who have become accustomed to its largely passive approach to the currency in recent months. "Nationalised banks likely triggered the stop losses by selling dollars around the levels of 54.10/15, following which the market momentum took care of the rest for the rupee," said Hari Chandramgathan, a forex dealer with Federal Bank in Mumbai. One trader at a large textile exporter said the effect of stop losses being triggered was "sharp." That encouraged software and diamond exporters, who had held back their dollar receivables anticipating further decline, to hedge their flows. RARE DEVELOPMENT Ashtosh Raina, head of forex trading at HDFC Bank said the impact of lowering the trading limits will be "huge because banks will not be able to keep speculative positions open for a long time." Apart from reducing banks' forex trading limits, the RBI also said forward contracts booked by foreign institutional investors, once cancelled, cannot be rebooked. For a link: http://rbi.org.in/scripts/NotificationUser.aspx?Id=6872&Mode=0 Traders said one other step the central bank could announce at its monetary policy review on Friday to help shore up the currency would be to boost dollar inflows by removing caps on interest rates on non-resident deposits. On November 23, it raised the interest rate ceiling on the non-resident external rupee deposits and the foreign currency non-resident banks (:FCNRBFCNRBnull) deposits. However, any comfort for the rupee is still some time away given India's worsening economic growth outlook and a widening trade gap. "It (the rupee) doesn't seem to have a circuit breaker and global environment for risk assets is likely to remain poor near term," said Sean Callow, senior currency strategist at Westpac Banking Corp in Sydney. Offshore non-deliverable forwards (NDFs) were indicating further weakness, with the onemonth rupee NDFs at around 54.18. Callow said the rupee could test 55 against the dollar in the short term. However, the central bank's policy review on Friday could offer some succour to the panicky foreign exchange market.

While markets do not expect an interest rate cut, analysts expect the central bank to signal a stronger resolve to intervene to hold up the beleaguered currency. "We cannot rule out one more hike if the rupee extends its free-fall beyond 56 (to the dollar)," said J. Moses Harding, head of asset-liabilities committee at IndusInd Bank. (Writing by Saikat Chatterjee; Editing by Malini Menon and Tony Munroe)

Currency fluctuation and your investment!

By BankBazaar.com

Rupee falls at Rs 48 a dollar. Do we even care for such news? We leave it to NRIs to worry about the exchange rate. For domestic investors, does rupee fluctuation hardly make any difference? Most investors do not read between the lines regarding how rupee fluctuation impacts their investments. Moreover, the exchange rate phenomenon seems esoteric for most of the common investors. In this article we will discuss some aspects of rupee fluctuation on our investment. Currency fluctuation There are mainly two ways by which currency rates are managed. Firstly, countries fix their currency against dollar. Hence the exchange rate doesn't change. Government takes action to manage any fluctuation that may happen. Secondly, countries leave it to the market to decide their exchange rate. In such a system, countries follow policy of non-interference. India doesn't have a fixed value of rupee against dollar but it also doesn't keep its currency completely floating against dollar. We have a system where the central bank allows rupee to fluctuate within a specified range. Usually, rupee appreciation is taken as economy gaining strength while depreciation is taken as Indian economy losing strength. How it impacts investors Let's look at how rupee fluctuation impacts investors' decisions. Let's look at appreciation first. Rupee appreciation Rupee appreciation is considered bad for companies where major part of their revenue comes from export. Appreciation of rupee makes products more expensive for export. When the products become expensive, importing nations either reduce the import or look out for other nations that can produce the same product at cheaper prices. Hence, any appreciation in rupee is often accompanied with clamour by export companies to devalue the currency.

Rupee appreciation is good for companies that depend on import from other countries. For example, oil companies, Parma, Engineering, and medical device companies will be fine with rupee appreciation. The machinery, oil, and engine used in such industries will be cheaper to buy. Investors can consider investing in such companies when rupees appreciate. Let's take an example. Suppose the rupee dollar exchange rate is 50 (i.e. Rs 50 - $1). A company in export sector earns a profit margin of 15% from export. If the rupee appreciates and the new exchange rate is Rs 40 = $1. In this case, the company has lost 20% of the income. This impacts investors in sectors that depend on export for their income. The typical examples are software industry and textile. Their dependence on export is heavy. Any rupee appreciation will hit software and textile industries hard. We have seen what happened in 2008 when America went into recession, dollar lost value and rupee appreciated against dollar. There were lay-offs, increased hours, flat revenues, and reducing profit. Investors in export oriented sector will be hit by any appreciation in rupee. Rupee depreciation Rupee depreciation is when it loses value against dollar. For a nation like India where import is more than export, rupee depreciation makes things worse because imports get expensive. This increases the deficit. Rupee depreciation is not a good signal except for export driven companies. For Indian economy, which depends on oil import, any fall in rupee will impact its oil bill. This will increased inflation because of increased oil bill. Increased inflation eats into the returns of investors. Moreover, a high inflation reduces the economic activity and consumption. Software companies, textile companies, and many other export driven sectors such as tourism are the ones where investors can think of investing. Their export becomes cheaper and hence they can sell more to the overseas clients. These companies will do well. Important points to keep in mind Since the global crisis is yet to stabilize, there will be extreme fluctuation of currency or rupee. Greek crisis, Eurozone, America's growth, and many other factors will impact the currency rate. The most recent example is rupee's fall from Rs 44 a dollar to Rs 48 a dollar within a month. This happened because Euro went down against dollar as a result of Greek crisis. As a consequence dollar improved not only against euro but against many currencies. Investors are requested to trade based on currency fluctuation only when they have some expertise in this. There will be times when rupee fluctuation may not impact individual companies or sectors because of other factors present. For example, if rupee depreciates against dollar further, there is not much chance that software industry will improve its income as they did in the past. They have become quite matured and going from here to the next level will require different ways to develop software.

Finally, the rupee dollar exchange rate will remain volatile till the crisis persists. Hence investors should practice caution when investing in exchange rate sensitive sectors