REASONS OF THE RUPPEE DEPRECIATION
One of the main reasons for the depreciating rupee is the widening current account deficit. India is running a persistent current account deficit in excess of 5% of GDP for the last several years. This can be seen in the chart below. Throughout the 1990s, India's merchandise exports expanded rapidly in line with the country's economic liberalization. The impressive growth continued in 2002–08, reflecting continued demand from its traditional and new markets even in an environment of slowing global demand, and likely reflecting India's relative competitiveness vis-à-vis other emerging markets. India's exports are also well diversified, comprising textiles and garments, automobile parts, and chemicals and pharmaceuticals.
As with the country's outflow of commodities, India's imports expanded over the 1990s as demand rose for raw materials and consumer goods in the burgeoning economy. India's domestic demand remains far stronger than external demand, resulting in relatively sharp higher imports. (India Country Monitor, Dec2013, p. 18)
The current account deficit was moderate till 2009, however became alarming in 2010 because the west went into a recession and the entire world was facing financial turmoil. So the Indian export sector was hit hard by the sharp ad protracted global recession, but the imports continued because the Indian economy was doing well. India's large trade deficit is primarily attributable to a rise in non-oil imports and investment goods in particular.
Thus the country's need for energy import and import of other raw materials and commodities steadily kept going up. India's crude oil production is virtually stagnant at around 30 million barrels per annum and that of coal at around 550 million ton per annum. The production of natural gas has significantly come down due to the shortfall in production in Krishna Godavari basin. In such a scenario, if the economic and industrial growth and GDP at 7 to 8% were to be maintained and stepped up, obviously energy imports have to increase at 9 to 10% per annum and with the Syria and Iran tensions, oil prices remained at a high putting a strain on India’s foreign reserves. (Venkataraman, August 2013)
As the capacity build up in the manufacturing sector have also fallen steadily, the import of several raw materials and commodities to sustain the economic growth are also steadily increasing. India is now becoming a dumping ground for import for several important products, which can be termed as building blocks such as methanol, acetic acid etc. whose imports have doubled in the last few years. In such circumstances, it is inevitable that the current account deficit is in excess of 5% GDP. (Venkataraman, August 2013)
In addition, gold imports were increasing as the countrymen thought that possession of gold was one of the ways to fight persistent consumer price inflation, which has been near 10% over the last few years. Bank deposits and other financial...