Indian Rupee Continues to Fall Against US Dollar

Along with the euro, the Indian rupee has fallen significantly against the US dollar over the previous twelve months. The USD/INR pair hit a record high at 56.53 in May. The slipping rupee threatens to slow down GDP and foster inflation, a problematic combination for India.The Indian trade deficit might be triggering a weaker currency, as India needs to buy dollars to pay back its debt. Likewise, India's foreign exchange reserves are shrinking. Without money in its Forex reserves, India needs to purchase dollars to pay of short-term debt, further choking the currency.The slumping rupee also threatens further inflation increases. At an approximate 7.55% inflation rate, inflation is already aggravating India's economy.Inflationary pressures continue to escalate as the country imports more goods. The costs of input goods are mounting, resulting in cost-push inflation. Yet, a declining rupee invites India to increase exports, as the exports will receive more rupees for the trade.In June, Business leaders including Wipro Chairman Azim Premji and Infosys Chairman Narayana Murthy have expressed despair about the current state of India's economy.The Reserve Bank of India (RBI) says that it is taking avid measures to control the rupee's slip and threats of inflation. RBI governor, Subbarao commented on the possibility of selling dollars directly to oil companies to ease pressures on the rupee. The dollar temporarily bounced to 55.08 against the rupee, but was short-lived, returning back to 56.40. Subbarao also spoke about the use of sovereign bonds in his press meeting, “We have done it in the past, it might be done in the future... but it's not something that is being contemplated right now.”Traders who expect additional rupee appreciation measures by the RBI and increased demand for rupees by US investors might consider buying the WisdomTree Dreyfus Indian Rupee Fund ETF (NYSE: ICN).Market participants who expect the rupee to continue on its current path of depreciation relative to the US dollar might consider selling ICN or selling Indian companies like Tata Motors (NYSE: TTM). Companies located in India might suffer from foreign currency translation losses if the rupee continues its decline relative the US dollar.