After creating nerves for Indian exporters, especially the IT companies, the rupee finally touched a month low by falling 43 paisa to close at 41.13 (it touched an intraday high of 41.18) on 8 June. It has dipped 90 paisa to the week’s high of 40.28 (also a 9 year high) during the week and might be a signal to the start of the downward cycle.

Another good news for Indian corporates was the 6th consecutive fall in weekly inflation figures to reach below RBI’s target of 5%, thus mitigating the need to increase interest rates. The inflation for the week ending May 26, 2007, was at an 8-month low of 4.85%.

The primary reasons for this fall in rupee are:

  • Consistent dollar buying by PSU banks at RBI’s behest
  • Heavy dollar purchases by oil companies due to high global crude prices
  • Global decline in equity markets
  • Weakness in Asian currencies
  • Fear of money outflow from emerging economies
  • Pull out by FIIs from markets during the week

If interest rates are not increased, then it would lead to economic growth as companies can borrow more from banks at reduced rates. The fall in inflation was primarily due to the fall in prices of food articles as the Government imported wheat and stopped export of lentils.

Inflation was primarily reduced by making rupee stronger to make imports cheaper (inflation figures are on a deferred basis, so the rupee fall is not accounted in the latest inflation figures). However, to maintain low inflation numbers, the government must make sure that prices do not rise due to supply constraints.