Rupee Vs Dollar
Indian National Rupee (INR) and US Dollar (USD) are the legal tenders in India and the US respectively. However, in international trade Rupee lacks the ability to be considered while Dollar, Gold. And some other currencies like Euro and Yen are accepted by almost all countries. Thus the dollar is an international currency while the Rupee is a currency in India only.
Why Does The Value Of The Rupee Fluctuate Against The US Dollar?
The value of any currency in the international market is determined by the supply and demand of the currency in the foreign exchange market. More demand for a currency and insufficient supply of it decreases its exchange rate value, thus improving the value of the currency. The value of the exchange rates fluctuation depends on various factors such as relative supply and demand for currencies, economic growth of countries, inflation outlook, capital flows, and so on.
What makes the Dollar stronger than the Rupee?
All the trade and financial exchanges:
- loans, or overseas investments,
- Foreign Direct Investment (FDI) or
- Foreign Institutional Investment (FII)
All these determine the capital of any country and affect the value of its currency. If any country exports more than it imports, then the value of currency will improve. And in case of vice versa, the value of currency will deteriorate.
The export to a country will bring dollars from the international market for the sold goods and services. Similarly, imports increase demand for dollars and the value of currency decreases.
If there is foreign capital inflow in India through FDI or FII, then the supply of dollars will be much higher than demand. And the Rupee will strengthen against the dollar. Similarly Rupee will depreciate in case of net capital outflow,
Other Factors
Dollar is an international reserve currency, more interest rates suggest higher returns. And the US is the largest economy of the world. So this minimizes the risk and the demand of the dollar increases. It is because of the difference between the US economy and the Indian economy. That the dollar is stronger than the Rupee.
After World War II the U.S. dollar (USD) became the most powerful currency in the world. By dominating international trades and transactions, more than sixty percent of global foreign reserves were in USD. Thus it became the most common reserve currency in the world.
As the value of foreign currency increases, exports get cheaper and imports get expensive. The vice-versa is also true.
Let us see some history
Rupee After India’s Independence
After 1947, India had no foreign debt or credit. So, It could have meant that 1USD = 1INR. But 1944, each country was required to value its currency in terms of the dollar. On that time compared to gold at $35 per ounce. India, as part of the agreement, started following the system of exchange rates. This was a floating exchange rate and that is why the value of the rupee fluctuates.
1 USD equals 25.92 INR in 1992. Since then the rupee kept falling, By 2002, 1 USD equal to Rs 48.99.
In 2007, the rupee’s value got to Rs 39.27 due to the foreign direct investment (FDI) inflow into the country.
Read more on the best remittance options for exchange rate fluctuations.
Again in 2008, the global financial crisis put up an end. And the rupee valued as low as Rs 51.75 by 2009. By 2013, 1 USD equals Rs 56.57.
What Controls The Supply And Demand Of the Rupee?
RBI controls the regulatory body of all the banks in India. It controls the supply and demand for the rupee in various ways. One of the ways is that it asks all the banks to either increase or decrease the interest rates. For instance, RBI ordered all the banks to increase interest rates on rupee accounts of Non-Resident Indians. As a result of this, the inflow of currency from NRIs went up and the demand for rupees was raised. Similarly, if the RBI orders to decrease the interest rates the rupee will depreciate.
Another way is that the RBI sells and buys US dollars in the international market. To control the value of our currency,the rupee.
Some of the other ways through the Reserve Bank of India, that controls the exchange rate.
Cash Reserve Ratio
RBI regulates the minimum deposit amount that a bank can keep reserve.
Statutory Liquidity Ratio
RBI regulates the minimum deposits that a bank needs to maintain in form of cash and gold.
Repo Rate:
RBI regulates the rate at which it lends money to the banks.
Inflation —
Inflation measures the degree of economic stability of any economy. Foreign investments are attracted by a low and stable inflation rate.
In 2013, demand of the dollar was increased due to foreign investments pulling out capital from the debt market and as result of that the Rupee depreciated against the USD, from 55.48 INR to 57.07 INR within 15 days.
Conclusion
As you saw, the Indian currency is very volatile in nature. The value of INR is often affected by international crude oil prices.
A fall in:
- Foreign investments in the Indian market
- Interest rates
- Inflation in the country
All these contribute to the dropping value of the INR. Imported goods become expensive, foreign travel and fees for studying abroad become costly due to devaluation of the currency.
Although, a strong currency does not necessarily mean good. The devaluation of the rupee has helped the Indian economy during an economic crisis. It has lowered the exchange rate and has improved the balance of trade. As a matter of the floating exchange rate system, the value of USD/INR is determined. By market forces and several international forces this USD/INR value will be considered.
The dropping value of the currency is a natural consequence. For a developing economy like India, this dropping value is likely to continue in the future.
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