The reason why Indian Rupee value tumbled against US Dollar

 

There were chain of events that lead to the fall of Rupee’s value against US Dollar. Let me list out the events in a sequence. Though I’m not a financial expert I have penned down what I’ve learnt from this crisis.

• Financial crisis erupts in various nations like Greece, Italy, Spain, Ireland in European Union as a result the stability of European Union came in to question.
• Financial crisis in Greece worsens even after several bailout package provided by other members of EU (mainly contributed by France and Germany). Bailout package is like a loan granted to the country, which the country has to repay once their economy is stabilized. In the past its been said that International Monetary Fund (IMF) provided similar loans to small countries in Africa and Asia and in case if the country is not able to repay the fund, the IMF gets the right to take natural resources of the country so as to nullify the debt. Some economists have argued that the IMF even though was aware that the poor nations wont be able to repay the debt, deliberately granted loan to them so as to loot the natural resources of those nations. Greek citizen feared that a similar situation might happen to Greece and so revolted in streets against bailouts.
• Other EU members felt the burden of Greek’s debt. A situation arises where Other EU members thought that it would be better if Greece quits EU membership. Even Greeks believed so and thought that they can rebuild their economy independently.
• If one nations gets out of EU, it may set a trend for other weak economies in EU like Spain and Italy.
• By this time investors have lost confidence on Euro, the official currency of European Union. As a result, the investors started flooding to the other most stable currency US Dollar. It means investors have began to trade using dollars instead of Euro.
• The demand for printed US Dollar increase in Foreign Exchange (Forex) Markets. In India oil importing companies and other importers have to pay their vendors in US Dollars only. So these companies have to exchange their Indian Rupee currencies for US Dollars.
• Exchanging currencies in Forex Market is nothing but buying US Dollar with Indian Currency. Since there is a high demand for USD already, there was shortage of USD in India Forex Market. So there would be a competition among buyers of USD and there would be obviously people ready to pay more than ever to get USD. It is by this process the value of Rupee falls against USD.
• Meanwhile there was also another reason for shortage of USD in India. Several Western investors who have invested USD in Private and Public firms in India started to withdraw their share due to uncertainty in Indian Economy. The ruling UPA Government’s powerlessness in making strong economic policies due to coalition party issues, eroded the confidence of investors in India. Moreover a string of corruption cases also set the trigger for the withdrawal of investors. So USD flow in India decreased.
• Since the value of Rupee fell, the petroleum companies had to pay more in Rupees for buying the same quantity of oil they bought previously. That's the reason why Fuel prices were hiked in India. Interestingly at this same time the crude oil prices were low in international markets. But due Rupee devaluation Indians were unable to enjoy the low crude oil prices.
• Meanwhile OPEC (Organization of the Petroleum Exporting Countires) felt that if the same trend continues in oil prices, their profits would be affected, so they have decided to reduce the oil production and that way they can create an artificial demand for oil in International Market. This way oil prices are expected to rise again. Again these burden will fall over the heads of Indians.
• As per the recent update from EU, the party which supported bailout plans in Greece won the Greek elections. This means Greece will not exit EU and will agree to bailout and austerity plans drawn by EU. So Euro crisis is expected to be extinguished in coming months.
• Interestingly India has agreed to contribute $10 billion to IMF fund for EU. IMF already has $430 billion in reserve for any economic crisis that may arise in EU. India has requested to other developing countries like China to contribute to bailout funds.

Some economists argue that it was the gambling by US that created the EU crisis deliberately. Also it was when Iraq’s Saddam Hussain and Libya’s Gaddaffi decided to switch over to Euro from Dollar for selling their oils the US threatened them allegedly. As they were adamant, those countries were invaded and spoiled.

I dont have supporting reference articles for all these points but they can be googled out from the web.