Hi Sandeep,

Under the current global fiat currency regime, currencies should float freely according to supply and demand. Free floating currencies would adjust in value until trade imbalances are minimized thereby preventing significant buildups of deficits or surpluses. Various departures from free markets create imbalances in the economy as the natural supply and demand for goods is altered. Central banks are constantly tinkering with money supply and interest rates (and bank loans through regulatory oversight) to override the natural equilibrium of free markets. In India's case, they are sending more money abroad than they are bringing in (current account deficit). Therefore, pressures have been building to reduce the value of the rupee to correct the imbalance. (A lower rupee will make Indian goods more attractive on the international market and stimulate foreign demand and improve capital flow into India).

The second issue you raise is about the Fed taper. The Fed taper means a tightening of US monetary policy and consequent strengthening of the US dollar. For the past five years it has been extremely easy to borrow cheaply in the US (as well as Japan and Europe) and invest that capital in Emerging Markets and earn a substantial spread. (known as carry trade). The unwinding of Fed policy threatens the carry trade and forces investors to unwind the position. Naturally, they must sell Emerging Market assets (bonds, stocks) and sell the currency, then find a new investment alternatives. Hope this helps!