The Falling Rupee !

The rupee fell to a new low of 61.21, raising the spectre of high inflation and threatening to throw government finances into disarray. A jiittery Reserve Bank of India (RBI) sold dollars and cracked down on speculation to bring back the rupee to 60.62 at close—up from 60.26 on Friday.
The rupee has depreciated almost 13% against the dollar since May and is the worst performing currency in Asia.
In the short term, it will hurt all Indians as businesses, including those in electronics and automobiles, hike prices to make up for the cost of higher inputs. General prices will also rise if the government chooses to pass on the cost of higher oil imports to customers. Given the potential for inflation, expectations of a rate cut from the RBI have vanished.

NEGATIVE IMPACT
Chances of rate cut now almost zero
Fresh hike in fuel prices likely
Overall prices to rise as costs of all imports shoot up
Fiscal deficit could widen due to defence purchases and oil subsidy
Fears of India slipping into sub-investment grade rating
Foreign education, travel to cost more
Margins of companies dependent on imports will shrink

POSITIVE IMPACT
Exporters could briefly gain but many clients may renegotiate prices
India as an offshoring destination gets more attractive
Hope that demand for gold imports may taper off, easing pressure on burgeoning current account deficit

WHAT IS RBI DOING?
Crackdown on speculators/ may block speculative purchase of dollars
Talking to oil companies on dollar demand. May sell dollars directly
May ask markets regulator Sebi to curb trade in currency futures and options

WHY IS THE RUPEE ASIA’S WORST PERFORMING CURRENCY?
1 Twin impact of US recovery – withdrawal of stimulus funds coupled with global funds chasing US bonds where yields have risen
2 India’s high current account deficit
3 Foreign investments taking a beating due to policy uncertainty
Fears of Rupee slipping to 65+ by next year
The rupee’s rapid weakening resulted from fears that foreign investors would exit emerging markets and invest in the US, which is showing signs of a faster recovery.
With market expectations settling at 60 as the new normal there are fresh fears of the rupee slipping to 65 or more next year as reflected by trades in the forward markets. Bankers feel that the RBI will come up with further controls, such as restricting dollar purchases only for trade and directly selling dollars to oil companies.
Unlike the dollar’s surge in June the current rally is worrying the RBI as the US recovery has also triggered a rise in crude oil prices. Some feel that the government and the RBI need to ensure that the rupee does not slip further in order to stave off a rating downgrade. S&P has warned of a one-in-three chance of a downgrade.