Recession in developed economies like USmade big institutions to pull out their moneyfrom India
Default concerns of European nations hasresulted in loss of confidence in the Euro andappreciation of dollar
The fear of bubble bursting in gold hasresulted in investors viewing dollar as a safecurrency
• Trade deficit has widened by 40,000 crores in the last quarter. This has resulted in increased imports and spike in dollar demand
Expecting current account deficit tosettle at 3.0-3.1% of GDP by Mar 2012
Q> In 2008, we saw a drastic Rupee Devaluationagainst the USD. Is the current scenario similar?A> No. Last time around, the devaluation wasdriven mainly by rise in oil prices. The price of oilreached USD 147 per barrel and was one of thekey contributing factors. However, risk aversionwas also a part which affected the value of theIndian Rupee.
Q> Has the Risk Aversion among the InvestorPublic changed when we compare the times in2008 to now?A> The concept of risk aversion is the same.But, the current situation is much more riskier.Back then, the problem was due to debtproblems in US. Right now, the problem is moreprofound and markets world-over are in a crisis.So, people are much more risk averse than whatthey were in 2008.
Q> If investors take out their investment fromEuropean countries to invest in US, would it haveany effect on the exchange rate of rupee?A> Not much. Only the US Dollar investmentsmade in India will affect the exchange valuebetween US Dollar and Indian Rupee. US Dollarinvestment in Europe will not affect theexchange rate in India.
Q> What can the RBI do?A> Raise policy ratesA> Use FOREX reservesA> Ease capital controlsA> Administrative measures