1. Strong position of dollar in global market
The main reason behind rupee fall was the immense strength of the Dollar Index, which touched its three-year high level of 84.30. The record setting performance of US equities and the improvement in the labor market has made investors more optimistic about the outlook for the US economy.
2. Recession in the Euro Zone
The rupee was also feeling the pinch of the recession in the Euro zone. From the past few months global economy was suffering from Euro crisis, investors were focused on selling Euros and buying dollars. Any outward flow of currency or a decrease in investments puts a downward pressure on the rupee exchange rate.
3. Decreasing rating by Rating Agencies & slow growth projection by IMF
Due to uncertainty prevailing in Europe and the slump in the international markets, investors prefered to stay away from risky investments. The credit rating agency such as Moody has downgraded the India to BBB with a negative outlook. IMF also signed 5.6% growth rate for the economy. This global uncertainty had adversely impacted the domestic factors and led to further depreciation of the rupee.
4. Pressure of increasing Current Account Deficit
The country with high exports will be happier with a depreciating currency. India, on the other hand, does not enjoy this because of crude oil and gold consist a major portion of its import basket. Euro zone, one of India's major trading partners is under a severe economic crisis. This has significantly impacted Indian exports because of reduced demand. Thus India continues to record a current account deficit of around 4.3%, depleting its Forex reserves.
5. Impact of Commodity Prices in Global Market
As there was a sharp fall in the commodity prices (of gold and crude oil) in global market still a large part of the import bill was driven by other resources as well. The fertilizer imports surged by 30% in the last two years and coal imports have...