The rupee went into a free fall on Thursday, declining 2.5 percent (or Rs. 1.23) against the USD. This is one of the sharpest single day drops in recent times.
When we observe the stock market movement and the Rupee movement, we can see that both the things are inter connected with each other. This is mainly because the Foreign Institutional Investors (FIIs) are the major key players in the markets and their buying as well as selling has a great influence in domestic stock prices.
First of all lets look what are the main reasons for rupee depreciation. The main reason for the weakening of rupee is the flight of foreign funds from the Indian Market, also the demand for Indian rupee is getting low.
Lets see how rupee depreciation affect the economy.
First lets look the positive sides. The weakening of rupees is good when we are talking in terms of exports. Since we get more amount of money equivalent to USD, the exporters will get more profit. For example IT giants such as Infosys, TCS etc. About 60 percent of their revenue comes from US itself. So their profit will substantially increase.
But there are some negative sides also.
The cost for importing goods and services will definitely increase because of this.
For example India Inc. importing 70 percent of the required crude oil from the foreign countries. So they have to pay a higher amount for the crude oil. This will result in the price hike in petrol and diesel and that will negatively affect the Inflation rate. I think if rupee is weakening like this, inflation will touch 2 digits soon.
Also raw materials cost will increase. So the production cost will increase. When the production cost increases the companies have to raise their cost and this will decrease the demand and eventually the net profit will go down.
I think the rupee can correct to 50.30 per dollar in the short term. It will be in the range 48.50 - 50.30 in the coming weeks.
Regards Hari " लोका समस्ता सुखिनो भवन्तु "
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