While oil hogs the headlines, it is also largely responsible for the depreciation in the national currency, as Indian appetite for energy and food remains unabated, even in the face of steadily increasing prices, and the Indian consumer can afford to meet the expense while the economy is still in 8 per cent plus GDP growth. As the import demand increases, demand for Indian exports decreases, particularly in the IT sector, reflecting the lack of appetite from demoralised US and foreign consumers.
The US recessionary scene has led to a steep drop in investor confidence, and FIIs have been scuttling out of their funds in India, and buying back their dollars in a hurry. Thus, capital outflows upset the seesaw while capital inflows have not shown an impact in this time, because credit is no longer easily and cheaply available to investors.
Demand for foreign currency rises in accordance to satisfy consumer demand for imports of oil, food, commodities and other goods. Our dependence on imports is further exacerbated with declining supplies from national oil refineries, as well as insufficient agricultural output. Without demand for rupees to match, the exchange rate continues to depreciate, unless there is some intervention or market correction.
