The recent devaluation of Yuan has led to weakness in rupee against dollar. In 2013, the rupee had touched an all time low of 68.85 intra-day trades and today (24.08.2015) it has touched 66.60 a USD. So far, it is the result of  devaluation of Chinese currency but what will happen when  U.S. Fed start hiking the interest rates and/or oil companies the world over start remitting  billions of dollars to Iran as a consequence of lifting of UN sanctions on Iran.  This would lead to an outflow of foreign funds from the emerging markets and India will not be an exception.

Let us analyse the reasons and results of falling rupee in Indian context.

In currency market rupee is a commodity  whose price   is the corollary  of demand and supply. In the present circumstances,  dollar is in more demand vis-à-vis the rupee.  

Reasons

There is a very big Giant in international market called Foreign Institutional Investor (FII). It keeps on moving from one economy to another in search of maximum gain. In 2008, when US and European economies were in shambles, the FIIs moved to Indian (and Chinese) economy, thus projecting a distorted image of strong rupee and higher index. India became complacent that its economy was stronger than US economy, thus   remaining under delusion   that   as per law of Mother Nature cycle, India would become the super power with no place for US to exist on this planet.

But keeping a giant at home is not devoid of inherent risk. The money from abroad was , inter alia, invested in stocks and put in deposits with the banks .  The mere investment in secondary market has no positive impact for the economy to grow whereas investment in deposits   carries   cost.  Since money was in India, that period was a  big opportunity  to develop infrastructure and production environment ,after all , the paper currency derives its strength from the sound economy , viz, lower current account deficit, lower inflation, higher employment etc .  But Alas! The period coincided with platitude of scams, investigations and inertia of making any  decisions in the country. The government and the parliament had become practically defunct. The country was left to Almighty God. Thus Nature played its cardinal principal ‘Only  fittest will survive’.

Now that the US economy is on recovery path, the giant FII, after its sojourn in India  and  wolfing  the wealth of the country by way of interest, dividend etc,  is flying back to its home town, bigger and fatter.