The rapid growth in inflation would also affect the forex market performance. On August this year, exchange rate of rupee with US dollar had depreciated to Rs 52.During 2008-09, when global economic crisis arose, at that time value of rupee regard to dollar was same as in this time.
Worrying about economy, the finance ministry has said, “…the view we take is that intervention should be limited and confined to cases where there is volatility and not to alter the trend.”
A report given by the mid-year analysis is, “The suddenness of this shift beginning in September was because of the global turbulence and the flight of capital to the relative safety of the US treasury. However, given that inflation has been high in India compared to the US, it is only to be expected that there will be some depreciation in the rupee vis-à-vis the US dollar.”
The reason for their worries is that more pressures on domestic inflation as imports become more expensive and lack of confidence and potential capital flight.
This would lead to financial problem of current account deficits (CAD) which deals with appreciation in exchange rate and depreciate the value of rupee. The review categorically dismisses all three concerns.
However In Lok Sabha, Finance Minister Pranab Mukherjee reviewed , “First, some volatility as we have already seen is substantially due to global currency markets and has very little to do with India. Second, allowing some flexibility in market rates is entirely appropriate and usually self-correcting and given India’s higher inflation, some of the depreciation merely reflects this.”
But one side by clarifying it said that all things were going to be right way and there was hold on inflation allowing some flexibility in market rates appropriate and usually self-correcting and, given India’s higher inflation, some of the depreciation, merely reflects this.
On the other hand the Rs 47.63 per US dollar in September 2011. The value of rupee depreciates to 52.73 against the dollar.