This presentation is about the Indian Economy and the strength of USD against INR. This slideshow presents the causes and the solutions of gaining more strenght.
2. Indian National Rupee and US Dollar are the legal tenders in India and
the US respectively. Both USD and INR are accepted in the US and India
respectively because they meet the following conditions which are
necessary for anything to be called money –
1. General Acceptability
2. Unit of account
3. Store storage
4. Medium of Exchange
For general acceptability means that no one should refuse from
accepting it; a unit of account means that it can be used to represent
the real value of an economic item; for a store of value, it means that if it
is stored, its value must not perish; and for the medium of exchange, it
means that it can be used as a medium for the exchange of goods and
services.
3. As it is already explained why the Rupee is a national currency while the
Dollar is an international currency, now let’s take a look at the factors
which make the Dollar stronger than the Rupee.
Rupee Vs Dollar
4. 1. Current Account
Deficit
The value of any currency in terms of
international currency is determined by
the demand and supply of the
international currency in a particular
country and the demand and supply
depends on the nature of Balance of
Payments (BOP) of a country. BOP is the
foreign trade account divided into two
parts – Current Account and Capital
Account. All the trade in goods and
services and foreign remittances are
entered in current account while
financial exchanges like loans, or
overseas investments, Foreign Direct
Investment (FDI) or Foreign Institutional
Investment (FII) etc. are the part of
capital account.
If the value of exports is higher than the
value of imports, then there will be a
current account surplus and there will be
a current account deficit if vice versa.
The export from a country determines
the supply of dollars as they will receive
a dollar from the international market for
their sold goods and services. Similarly,
the imports determine the demand for
the dollar. If imports from a country are
higher than the exports from that
country, then the demand for the dollar
will be higher than supply and the
domestic currency like Rupee in India
will depreciate against the dollar
5. Movement Of Capital
Not only just the current account but the
capital account of BOP also determines
the value of the dollar against a
currency. The capital account details the
flow of foreign capital in and out of the
country. If there is the net foreign capital
inflow in India in the form of FDI or FII,
then the supply of the dollar will be
much higher than the demand and the
Rupee will strengthen against the dollar.
Similarly, if there is net capital outflow,
Rupee will depreciate.
Other Factors
There are several other factors also
which determine the supply of dollars
into the country. The foreign capital
usually flows into the region which
provides minimum risk and maximum
returns. Higher interest rates in a
country suggest higher returns.
Therefore whenever the Fed Reserve of
the US increases the interest rates, there
is turmoil in all financial markets across
the globe because there is a risk of flight
of the Dollar back to the US. Since the
US is the largest economy in the world, it
also minimizes the risk. As the risk
factor also determines capital
movement, most countries give
significance to the risk rating by
international agencies like Moody’s,
Fitch, etc.
6. Increase in the
price of the
crude oil
As we all know that India
produces just 20% crude
oil of her requirement and
rest is imported from the
other countries like Iraq,
Saudi Arabia, Iran and
other gulf countries.
Crude oil is the biggest
contributor in the import
bill of India.
According to a January
report from energy
research and consultancy
firm Wood Mackenzie;
The daily fuel demand of
India is expected to more
than double to 190,000
barrels in 2018, up from
last year’s 93,000 barrels.
Increasing
Trade Deficit of
India
A situation, in which the
import bill of a country
exceeds its export bill, is
called trade deficit.
Indian merchandise trade
deficit of $157 billion in
2017-18 was the widest
since 2012-13. In the FY
2012-13, the country had
reported a merchandise
trade deficit of $190
billion. Trade deficit was
around was $ 118 billion
in the FY 2016.
Atmosphere of
Political
Uncertainty
As per many surveys; done
by the media houses, the
popularity of the current
NDA government is
decreasing which is
creating the atmosphere of
the uncertainty among the
foreign investors.
Major point of uncertainty is
that whether the current
NDA government will retain
the power at centre or not.
If the new government
comes in the power and
changes the FDI and other
policies then the money of
investors will trap.
Beginning of
trade war
between the
USA and China
The US President Donald
Trump has initiated the
trade war with China and
European countries and
India and these countries
also retaliated in the same
way. So due to this war
the price of the imported
commodities will go up
which will further increase
the outflow of dollar from
the Indian market.
As we know that Indian
import bill is always
greater than its export bill.
Out flow of
Foreign
Currency
It is worth to mention that
when the foreign investors
find other attractive
markets in the other parts
of the world; they pull out
their invested money by
selling the equity shares.
But they demands the
most respected currency
or easily accepted money
i.e. dollar. So in such
situation the demand of
dollar increases which
further increases its price.
Causes
7. India celebrates 72 years of independence in 2019 and even its citizens still have a
myth about the dollar: believe that since 1947 the Indian rupee has devalued to the
point of believing that the change in 1947 from 1 USD to INR was exactly 1 Rupee
But, unfortunately, this is not true.
In 1947 India was free and at that time, the country had no outstanding credits to
keep the rupee on par with the American dollar. In this year, India was still under the
stable value of the British Pound, so from 1927 to 1966, 1 Pound had a value of 13
INR. In this same year, that is, in 1966, the rupee presented its first devaluation.
After independence, India was linked to the US dollar for a value of 7.5 INR to 1 USD,
a value that remained until 1971. And how is this value calculated? Because, as we
mentioned before, although India obtained its independence in 1947, even so, the
currency was still linked to the Pound and its value was 1 INR for 1 shilling and 6
pence and the value of 1 Pound was equivalent to 4 dollars, it is said that 1 USD to
INR prediction had around 3 INR.
Dollar to Rupee Value
in 1947
8. When Will Indian Rupee
Value Increase Against
Dollar?
The red line set by the US Treasury to be included in the list of possible currency
handlers is set at 2% and although India has not exceeded this limit, Indian
purchases have risen to 1.8% of GDP. A warning that may curtail the initiatives of
the central bank to try to stop the revaluation of the national currency.
Not being able to intervene beyond this limit can further increase the value of the
rupee and an overvalued currency is synonymous with expensive exports that
obviously harm competitiveness. But entering the Treasury list has other
drawbacks.
The USA can trigger sanctions if the country meets these three criteria at the
same time: persistently intervene in currency markets, have a significant trade
surplus with the USA and have a large current account surplus.
9. Why is USD Getting
Stronger Against INR ?
So far this year, the Indian rupee does not exceed 70 rupees the dollar and this may be
due to low industrial production. On the other hand, the dollar gained strength after the
inflation suffered by the country, with the result that India obtained an increase in
interest rates.
Another reason is that the withdrawals of the 500 and 1000 rupee notes, will have
consequences on the country’s economic demand along with the loss of value in real
estate and other sectors, which will cause a weakening of the rupee, and in the end, we
can have a USD to INR prediction.
In this way, it is very likely that the dollar will take on strength and overcome the Indian
rupee, causing an increase in the remittance of funds in the country.
Although only two decades ago, India had been listed as one of the poorest countries in
the world, marginalized for a long time on the international stage, from now on it is
considered a brilliant and immense power, to such an extent that the US banking group
expects it to take third place in the global economy by 2025.