Decline in the value of a currency in comparison to another comes if the supply of the former is more than requirement (i.e. detnand) and the demand of later increases than its supply, as a general principle. But many other facts and factors plays a role in real economy.
In 1995-96, Indian Rupee started to decline in its value vis-a-vis U.S. Dollar because of some specific reasons, some of which can be mentioned as:
i. Rumours of market, which gave way to hasty transactions in Rupee US Dollar.
ii. Increase in balance of trade deficit.
iii. Increased import from and reduced export to U.S.
iv. Import of petroleum rose very steeply in the recent period reducing reserve of U.S. dollars.
v. Foreign investment by Indian exporters which did not bring the value of their exported goods to India.
vi. All these reasons played their proportional role in decline in value of Indian Rupee. The Reserve Bank of India had to take some corrective measures due to the drastically changing picture of currency market on account of quick and needless reactions of Indian businessmen contributing to the decline.
vii. If proposed some policy measures to increase export and decrease import.
viii. It released dollars to make sufficient availability in market.
ix. Proposed some restrictive measures on import.
x. Invited and encouraged investments by NRIs in India with profitable terms.
xi. Supplemented supply of dollars in market by financing the deficit of dollars.
These measures were curative and some of them are also helpful as preventive measures as they can help preventing such incident in future.