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The fluctuation of the rupee against the dollar is an aspect of daily news. The value of the rupee, like any other currency, changes almost daily. This concept of currency fluctuation is part of a larger foreign exchange market. To understand the concept and process of currency valuation, one must look at the foreign exchange market.
In simple terms, one currency is traded in another currency for a certain amount. The exchange rate for two particular currencies is called the exchange rate. On 15 August 1947, the exchange rate between the Indian Rupee and the US Dollar was equal to one (i.e., 1 $ = 1 Indian Rupee).
The Indian rupee and the USD are the current currencies of India and the USA, respectively. These currencies are accepted because of the following reasons-
- General acceptability
- Store of storage
- Unit of account
- Exchange medium
In international trade, the rupee does not have general acceptability. However, the dollar is accepted as a medium of exchange. Hence, it makes the dollar an international currency, unlike the rupee, which is just the national currency of India. Also, the value of a currency is determined by the capital movement.
Rupee Vs. Dollar
Let us now look at the factors that make the dollar stronger than the rupee –
Current Account Shortage: For any currency to become an international currency, its demand and supply are determined. All the business and trade-related goods and services and foreign remittances come under the current account. On the other hand, Foreign Direct Investments, overseas investments, and other such financial exchanges come under a capital account, resulting in capital movement.
If exports of a country are more than the imports, the demand for the dollar is higher than the domestic currency like the Indian rupee and vice versa. This results in the depreciation of the Indian currency.
Capital movement: The capital account also determines the value of the dollar against a currency. The capital account explains the capital movement of foreign capital flow. If the net capital movement is the inflow of money, then the Indian rupee will strengthen compared to the dollar. This inflow can be because of Foreign Direct Investment or Foreign Institutional Investment (FII). Likewise, if the capital movement results in the outflow of money, it will depreciate the Indian rupee.
Other factors: Several other factors play an important role in determining the dollar supply in various countries. The inflow of capital movement is highly noticeable in regions of minimum risk rating and maximum returns. Risk factors also play an important role in the determination of capital movement. This has become why many countries give risk ratings to international agencies. These international agencies are usually Moody’s, Fitch, and other such agencies. Also, the Dollar is an international currency; This is why it overpowers all the other currencies, including the Indian rupee. Moreover, the strength of the United States’ economy compared to the Indian economy is another reason for the dollar to overpower the Indian Rupee.
Conclusion
In short, the rupee depreciation can be related to the deficit in the current account. This is also because of the deficit of higher trades due to the increased import bills. Also, the recent fall in the value of the Indian rupee has been because of the war between Russia and Ukraine. The war has led to an increase in the price of crude oils. Hence, the rupee fell to 76.9800 per dollar, which is even lower than the fall of the Indian rupee in 2020, which was 76.9200. Lastly, delays in the upcoming financial year also resulted in even more fall in the value of the Indian rupee.
