Indian rupee (INR) has depreciated by more than 20% over the last one year (See appendix 1). This has raised a debate if a currency crisis is unfolding in India. The decline in Indian rupee looks nothing less than a devaluation of the currency. The key concerns associated with depreciating currency are strong dollar, falling GDP growth, policy uncertainty, deteriorating current account deficit and insufficient capital flows. We will highlight key concerns on the INR, steps taken by government/RBI, suggestions and outlook in this note.
Reasons for the fall in INR
- Increased uncertainty in global macro-economic landscape due to deteriorating European debt crisis.
- The strength in the USD due deteriorating European debt crisis and relatively strong US economic conditions.
- Governance deficit related with economic reforms and decision making.
- Sharp slowdown in GDP growth to 5.3% Y-o-Y in Q4FY12 from 9.2% Y-o-Y in Q4FY11.
- Elevated current account deficits at 4% of GDP in FY12 as compared to 2.7% in FY11. During Q3FY12, for the first time after Lehman crisis, India witnessed overall balance of Payments (BOP) deficit.
- Adverse taxation & policy developments related with retrospective taxation and taxation of offshore investment vehicles/structures.