Which of the following factors are responsible for the depreciation of Indian rupee (in 2011-12)?

1. Capital account flows
2. Persistent inflation
3. Interest rate difference
4. Current account deficit

Indian currency (INR) has depreciated close to 22% in the last 1 year. The persistent decline in rupee is a cause of concern. Factors that pushed INR into the well are: 1. Continued Global uncertainty: Owing to uncertainty prevailing in Europe and slump in international market, investors prefer to stay away from risky investments (flight to security). 2. Current Account Deficit: 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. 3. Capital Account flows: Deficit countries need capital flows and surplus countries generate capital outflows. India needs dollars to finance its current account deficit. 4. 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. 5. 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. 6. Lack of reforms: Key policy reforms like Direct Tax Code (DTC) and Goods and Service Tax (GST) have been in the pipe line for years. A retrospective tax law (GAAR) has already earned a lot of flak from the business community.