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why is indian rupee weakning?

ANSWER TO THE ABOVE QUESTION In simple terms Value of a currency is purely based on demand and supply. Value of a comodity increases when it is in demand and the same applies to Currency as well. Indian rupee was in demand when all the western investors were investing in India. And during this phase Rupee rose stedily. When recent recission started to surface, Foreign investers started to pull back their investments and started investing in Gold. So Rupee was out of demand and so its value decreased. Inflation also plays a part. If the inflation is higher, the value of currency goes down. In feb 2012 US inflation rate is at 2.9% and India's inflation rate is 8.8. As US $ is taken as a standard for determining the exchange rate of a currency, so if the inflation on comparison to US is high, the value of currency will be less. Its important to understand how the value of rupee affects Indian economy. If rupee value is less, the imports (Like OIL) will become costly but the exports (BPO and IT services) will fetch more value and viceversa happens when rupee value is high. So Rupee value should neither be less nor be more. If it reaches extreem ends either imports or exports will be affected. So Reserve Banks from time to time takes steps to stabilise the value of rupee.

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