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Rupee Vs Dollar: Where This War Is Heading?

By Expert Author: Sachin kumar

One of the biggest factors that affect s the Indian economy is the relation of rupee to over fears dollar. In this article, Shareway team will provide with all the possible reasons affecting the economy. In recent times, the rupee plunged to a new record low against the dollar that foreign capital could flow back to the US as the American economy improves.

Rupee’s Journey so far

In 1947, at the time of independence t he Indian rupee was at par with the American dollar, this means that the Indian currency has depreciated manifold against the green back in the past 66 years. There was no foreign borrowing on India’s balance sheet at that time. Let’s look at the journey of few years:

Year 1947: Rupee and dollar was equal = Rs.1, by 1966 Rupee depreciated too Rs. 6.35 against 1 dollar. Till 1990 dollar has become much stronger as rupee was touching a level of Rs. 18. Rupee took a steep jump by end of millennium by touching Rs. 43. By mid 2013 it was touching Rs. 69.
Reasons:

The value of a country’s currency is linked with its economic conditions and policies like:

1. Increased imports and less of exports
2. Inflation
3. Interest rates
4. Growth rate
5. Trade deficit
6. Foreign exchange reserves
7. Foreign investment inflows
8. Performance of equity market
9. Balance of payment (trade balance between net inflow or outflow of money)

Now look at some of the reasons how rupee appreciates against dollar:

In 1991, Indian government started liberalization policy to invite foreign investment in India which boosted the economic growth to a large extent. Some of the other factors include:

1. Controlling the supply of money in the market
2. Change in interest rates
3. Relaxation or tightening of rules for fund flows
4. Tweaking the Cash Reserve Ratio (CRR)
5. Fix statutory liquidity ratio (proportion of money banks have to invest in government bonds) and repo rate (at which it lends to banks) - (It increases or decreases the quantity of money available)
6. Deregulate the interest rates on savings, deposits and fixed deposits held by NRIs.
7. Curb on Indian firms investing abroad and on outward remittances by resident Indian.
8. Government has also raised import taxes on Gold and Silver in an attempt to narrow the current account deficit.

Effects:

1. Inflation – Increase in price of any goods or services decreases the money value and thereby, decreases the purchasing power of an individual.
2. Imports get costlier
3. RBI can’t print money without the economy growing at the same pace, mismatch between the economic growth and money supply will result in catastrophe. If it happens economy will face deflation or negative inflation, purchasing power of money will increase and if you think deflation will help you consume more and enjoy life more, you are wrong. In modern economy, government based on their assessment of future economic growth and demand. The purchasing power of currency remains constant if increase in money supply is equal to rise in GDP and other factors influencing currency remains unchanged.
4. Loan repayment will be lesser burden if interest rates are fixed as you will pay the same amount but with the lower valuation

For Stock investors, rupee is a key factor to watch out for, a weakening rupee in India’s market which is highly sensitive to FIIs flows. Reason for this is simple; FIIs hold 24% of BSE. 500 companies, and any fall in the rupee lowers their return since they earn less in dollar, this leads them to exit door and weakens the rupee further as they sell their India’s investment and exchange rupees for dollars to invest somewhere else.

If you need some foreign currency in the future such as for the education of your child abroad or any vacation abroad, plan right now and hedge your risks with the help of currency futures, consider the basics of currency movements and their likely impact before taking your next investment decisions.

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