Which of the following were the causes/reasons behind the depreciation of Indian rupee in year 2012?

1. Adverse capital account imbalance
2. Persistent Inflation
3. Widening current account deficit
4. Interest Rate Difference

While a country like China will be more than happy with a depreciating currency, the same doesn't apply for India. China exports more than it imports, thus a depreciating currency makes its exports cheaper in the International market, in turn making China more competitive. India on the other hand does not enjoy this luxury, mainly because of increasing demand of oil, which constitutes a major portion of its import basket. The fall of oil price to $90/barrel has helped India to fight the depreciating rupee up to some extent but at the same time Euro zone, one of the major trading partners of India is under severe economic crisis. This has significantly impacted Indian exports because of reduced demand. Thus India continues to see current account deficit of around 4.3%, depleting the Forex Reserve and thus depreciating INR. Capital Account flows: Deficit countries need capital flows and surplus countries generate capital outflows. India needs dollars to finance its current account deficit. Institutional investors investing in India are directly impacted by the global market uncertainty. Persistent inflation: India has experienced high inflation, above 8%, for almost two years. If inflation becomes a prolonged one, it leads to overall worsening of economic prospects and capital outflows and eventual depreciation of the currency. Interest Rate Difference: Higher real interest rates generally attract foreign investment but due to slowdown in growth there is increasing pressure on RBI to decrease the policy rates. Under such conditions foreign investors tend to stay away from investing. This further affects the capital account flows of India and puts a depreciating pressure on the currency.