Why Indian Rupee is Falling Against US Dollar when the US Economy is in a Mess ?

I hope at least some of you would have been curious about this topic at some point of time. The whole world is screaming about US economies inefficiencies and evident deficiencies and yet our currency is falling further down against it. And to make the confusion worse we are one among the few markets touted to grow at a healthy rate of 6-7% in 2009 and hence we should have the better side of the bargain. We have a strong domestic demand and have immense potential of growth in all the industries considering the under penetrated market left in the country. So this question drove the researcher in me to analyze the situation and bring it down to the layman understanding.

I know it is a boring topic and will do utmost justice to make it look as interesting as possible. So initially i will put forward some of the basic factors affecting currency valuation

Balance of trade - the difference between the total import and export in the country,Demand for the Currency,Interest rates, Investments in stock markets, Interference from Central bank and Financial Authorities, Political Stability, Economic growth rate, Crude Oil prices etc.

S, o where are we going wrong to get our currency devalued, to analyse this we have to consider the various political and economic situations. The economic meltdown has led to fall in demand and consumption world over resulting in falling imports, exports and demand projections. To emphasize on the impact of meltdown consider the basic indicator of crude oil prices. The crude has fell from an all time high of 150 $ in mid 2008 to a drastic low of 35 $.

So lets come back to our main point, when the crude oil prices fell so much, the currency in which it has been traded world over has got an instant demand and hence the circulation of the currency has widened. Another reason can be that due to the economic meltdown a lot of institutional investors like banks and insurance companies from USA has withdrawn their investment from our stock markets approximately 9 $ billion against the inflow of 2 $ billion so this has led to a negative balance of fund influx. And due to the withdrawal of financial investments from the market the demand for our our currency has also reduced to a large extend.

Adding to the financial factor we have impending elections, brutal terrorist attack, a hostile neighbour and a falling stock indices has created a instable image in the world market. This is compared to the baston of hope and expectations which has risen under the brand name Obama in our comparative market. They have also influxed a total of +1 trillion into the economy as a bailout package which has created further currency circulation. This amount is almost equal to our annual GDP and can further affect our currency negatively.

As a conclusion i will pointout that a falling currency rate can be a boon in disguise because it will help the cause of our struggling exporters by making Indian products cheaper in the world market and hence attractive. The undervalued currency strategy has been followed by economies like japan and China to boost their trade over the years. So we don't have to fret about this at least and believe that everything is for our economies benefit.

tc.

Global Recession for Dummies

The most popular topic of discussion list has been topped by global recession for the last few weeks in every known social circles. We have been bombarded with technical terms like recession, sub prime crisis, Repo Rate, CRR, which sounds very confusing and threatening. To add to the confusion, share market crashes world over, highly fluctuating currency rates, unending downsizing reports, mammoth banks closing shop, countries begging for funding, crude oil rates plummeting (that sounds good in last three months the price has come down from 148$ to 52 $ today). So where did things go wrong, why did one fine morning things started going out of control and as far as i know this is just the tip of an ice berg which will last for another year or two. So with my simple understanding let me put the crisis into simple points in the order of occurrence

• Markets are steady and strong, banks are doing fine, people are happy.



• Banks decide it is OK to lend money to any one who applies (high risk customers) so people started buying properties, credit card funded extravaganza, big cars etc.



• This excess liquidity (money) started funding a shopping extravaganza, people went on shopping sprees buying over priced unnecessary products.



• This promoted manufacturing in Asian economies like China, India, Japan etc. New manufacturers entered the race targeting the newly created demand.



• The US banks have a provision for refinancing a property loan as and when the property prices increase, so the high risk customers started re financing property to pay installments on home loans and credit cards to stay away from trouble.



• This is when the basic market forces came into action, when anything is supplied to market more than the requirement, its demand falls and hence property prices started falling, thereby halting the refinancing frenzy.



• High risk customers started defaulting installments and banks started showing losses in their books, when the bank recalls the property to settle the loan it fetches far less prices than the loan amount.



• Banks starts to panic and approaches the all seeing insurance giants for assistance, they analyze that the crisis is too big to handle with their cash reserves, so they start to fall apart.



• More and more people starts defaulting installments, and this makes the situation worse.



• The honeymoon is over people start to realize that they don't have all
  that money to spend on unnecessary things and hence demand falls.



• When the demand falls, production gets cut down, people start loosing jobs
  this will create havoc in the manufacturing hubs.



• Now when the bank is already in a crisis they stop or reduce drastically the
  issuance of loans and credit cards.



• If loans are not issued people cant buy necessities like vehicles and homes again.



• When vehicle and home sales go down, steel consumption goes down, hence steel output is also slashed.



• This in turn effects the crude oil prices which keeps going down even after the production cuts.

This creates a scene of economic tsunami which starts effecting everything on its way. But the good part is any body who has liquid cash or easily cash able assets (gold, silver etc.) this is the time to invest when you can buy cheap really cheap and a piece of advice if you do invest don't watch the markets for another 1 year it might fluctuate more and more.