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Wednesday, March 12, 2008

Why did INR/USD depreciate by roughly 2%?

Ila Patnaik deciphers the recent INR depreciation.


  1. From the post it becomes clear that depreciation in rupee was engineered. Can you please throw light why RBI did that engineering? There must be some purpose behind that. What can be that purpose? Also I want to ask is it possible to remove the risk free interest rate differential (Only in case of Fixed deposit) to control the capital flow? Is there any regulation, which restrict us from removing that interest rate differential? I do not know the quantum of that but it might help upto certain extent and also if that money does not go back it will be invested in capital market which will beneficial to industry also.

    Please reply at your convenience.
    Prashant K Vakharia

  2. How can one take the advantage of interest rate differentials, especially in case of India?

    - FII investments in the debt market are barely allowed.

    - The FCCB route has virtually dried out, thanks to a sharp drop in stock markets.

    - Remittances do not have a history of tracking interest differentials. More importantly, there is very little outflow (<5% of the inflow), so the question on people parking to benefit from temporary movement in interest rate differentials does not seem to arise.

    - The only plausible reason therefore left is under/over invoicing ?? But, does it happen to such a significant level and more importantly over what period would a corporate hold/invest the currency to benefit from the interest rate differential?

    To my mind, therefore, the case for higher capital flows into the Indian economy due to the interest rate differential seems a little weak.

    Is it not possible, that the recent depreciation in the INR v/s the USD is more a result of market participants taking a negative view on the Indian Rupee, given the weakness in our stock markets and a rapidly slowing economy ???

    What's ur take on this sir?

  3. as credit bubble bust and neophytes' euphoria about indian GDP growth abates(that reverts to the hindu growth in the next ten yrs), rupee will breach 50 against dollar.
    Inflation in next 2 yrs will be huge issue politically as well..
    welcome to reality, watanbewallahs

  4. The author assumes that interest rate differential is only one driver for spot exchange rate movement. That is untrue.


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