New Delhi: The partially convertible rupee dived to a five year low of 47.11 on Monday but recovered somewhat to finally close at 46.95 a dollar for the day. Analysts say rising demand for dollars from oil companies and global volatility drove the rupee down.
Ashvin Parekh, National Leader, Financial Services of Ernst and Young says demand for dollars is being fed by oil importers as well as redemption of investment and the global liquidity crunch.
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Economist DH Pai Panandikar says, “Oil is no longer a factor. The main reason is the FIIs selling out. They are pulling money out to send to the US.”
If the rupee continues to fall, it could result in more problems for the Indian economy. Imports could get costlier resulting in further pressure on inflation.
Panandikar points out that imports constitute 15% of GDP. A 10% rise in the cost of imports could result in a 1.5% increase in the rate of inflation.
As FIIs continue to sell, compounding the crisis in the markets, they are also feeding the demand for dollars, putting further pressure on the rupee.