Do You Know Reasons behind Drastic Downfall in Indian Rupee against Dollar?

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The Indian rupee is currently one of the worst performing currencies in Asia. Even the currencies of minnows like Bangladesh and Pakistan are doing well than the Indian rupee in the international market. The value of the rupee against the US dollar was 66 on January 1, 2016. Since then it has devalued uncontrollably with its value falling to an all-time low of 73.6 on October 15, 2018. This sudden fall in the value of the rupee has raised the alarm that the nation might witness the repeat of the 2013 situation when Indian currency suffered a devaluation of 20% in just a few weeks.

What was the value of the Indian rupee in 1947, when the country became free and how it has devalued till date, we will take you through the history of the rupee to answer your questions?  This detailed post will answer all of your questions.

Here is how rupee has devalued against the US dollar since 1947 till 2018. Go through the table and know what the value was in 1947 and what it is now.

Year

Exchange rate

(INR per USD)

1947

3.30

1949

4.76

1966

7.50

1975

8.39

1980

7.86

1985

12.38

1990

17.01

1995

32.427

2000

43.50

2005 (Jan)

43.47

2006 (Jan)

45.19

2007 (Jan)

39.42

2008 (October)

48.88

2009 (October)

46.37

2010 (22 January)

46.21

2011 (April)

44.17

2011 (21 September)

48.24

2011 (17 November)

55.3950

2012 (22 June)

57.15

2013 (15 May)

54.73

2013 (12 Sep)

62.92

2014 (15 May)

59.44

2014 (12 Sep)

60.95

2015 (15 Apr)

62.30

2015 (15 May)

64.22

2015 (19 sep)

65.87

2015(30 nov)

66.79

2016(20 Jan)

68.01

2016(25 Jan)

67.63

2016(25 Feb)

68.82

2016 (14 April)

66.56

2016 (22 Sep)

67.02

2016 (24 Nov)

67.63

2017 (28 Mar)

65.04

2017 (28 April)

64.27

2017 (15 May)

64.05

2017 (14 August)

64.13

2017 (24 October)

64.94

2018 (9 May)

64.80

2018 (Oct)

74.00

External Factors Affecting Indian Currency

In 2018, the Indian rupee has devalued to a record low level. In October 2018, its value reached 73.6 rupees against the US dollar which obviously is not good news for Indian citizens.  What actually has led to this sudden fall in the value of rupee in 2018, even the legendary economists seem clues about it.  However, the majority of them believe that external factors have done more damage to the rupee than the internal factors.

According to economists, internal factors can be brought into control through currency controlling measures but it is difficult to stop the impact of the external factors on the rupee.

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We talked at length with some of the prominent economists of this country who told us about some external and internal factors affecting Indian currency.

Here are some excerpts from the conversations we held with some of the prominent economists of this country to discuss the reasons behind the fall of the rupee.

When India got its freedom on 15 August 1947, there were zero outside borrowings on the balance sheet of India. The value of the rupee was at parity with the US dollar. This arrangement continued till 1966.

The rupee started devaluating in 1966 and reached 7.5 rupees per dollar in 1971.

This fall and rise of the rupee continued in the subsequent years as well. Sometimes the currency value got up and sometimes it went down.  There were times when the value of the rupee remained static for months together.

Mohammad Idrees is a former Professor of Economics. Idrees believes that internal factors can be brought into control by RBI   through currency controlling measures but it is difficult for the GOI & RBI to stop the impact of the external factors on the rupee.

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“You can’t do anything about the rising oil prices in the international market. You can just wait till the prices come down and your currency value sets on the recovery path,” said Idress.

According to Idrees, the United States Federal Reserve has tightened the monetary policy which has brought down the price of American debt and its yields have increased.

“The yields and bond prices are moving in opposite directions.  As a result of, investors are investing in the United States and pulling money out of their nations,” he said.

 “The investors are expecting higher returns in the US and that is why they are pulling money out of India,” he added.

According to a recent report of RBI, in the first half of the year 2018, foreign portfolio investors pulled out 47836 crores from India. It is the highest outflow of money from India in a decade.

“The fall of rupee has benefited dollar.  The dollar index has risen by near about 6.5% since February 2018,” said economist Ram Verma.

Ram said that Indian importers are buying dollars against money to purchase oil in the international market as there is a shortage of oil supply in the country. “This has led to the further devaluation of the rupee,” he said.

According to some economists, the rising fiscal deficit of the Government of India is also worrying investors. According to them, it has raised the risks of the RBI printing rupees to meet Government expenses, and if RBI will take this step, it will further decrease the value of rupee.

“The increasing demand for foreign goods increases demand of international currencies, and, thus, leads to the devaluation of the local currency, “said one of the economists.

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According to the head, commodity and currency research, Kishore Narne, the nations that sell more services and goods in the foreign markets than they import have strong currencies as more currencies are coming into their nations than what is paid to buy foreign products.

“If your exports exceed imports, the value of your currency will increase in the international market,” said Narne.

One more factor that affects the value of a currency is the difference in the interest rates between nations. RBI has recently launched a move to deregulate the interest rate on fixed and saving deposits held By NRIs.

Internal Factors Affecting the Value of Rupee

The value of a currency is affected by several external and internal factors. The external factors that affect the value of a currency include foreign exchange reserves value, the performance of equity markets, foreign investment inflows, and geopolitical conditions.

We have discussed these external factors in the above section. In this section, we will discuss internal factors which are affecting the value of Indian rupee in the international market.

The internal factors that affect the value of a currency include inflation, emp0loyment, interest rates, geopolitical conditions, trade, growth rates, etc.

Export finance problem is considered one of the major internal issues affecting the value of rupee. The export finance issues are discouraging the small and medium business enterprises is export finance problem.

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It had been bothering exporters so the issues need to be sorted out with the first preference. It may take time owing to the inelastic nature of the export market but once the problems are sorted out, it will boost the export industry in the country.

According to an economist, the East Asian economy has not suffered too much because their export finance policies are not disoriented like India.

Measures RBI and GOI Should Introduce To Stop Further Devaluation of Rupee

The unexpected heavy decline in the value of the rupee has made it mandatory for the RBI and the Government of India to take some steps to stop the further devaluation of Indian currency in the international market.

The motive behind all these RBI measures should be to manage the value of the rupee according to the situation. Economic experts suggest several measures to RBI and GOI to increase the value of rupee and stop its further devaluation in the international market.

Here are a few measures that the RBI and GOI can take to protect the rupee from further devaluation:

1. Resolving  Export Financial Issues

Many economic experts believe that reshaping oil contracts and bringing solutions to export finance issues may help. “The Reserve Bank of India needs to articulate its vision on the rupee. Only that will prevent the free fall of the Indian rupee against US Dollar”, said Kishore Narne.  According to Narne, East Asian economies have not suffered too much because their export finance policies are not disoriented like India.

2. Cool The Exchange Rate By Supplying Dollars

Some economic experts are of the opinion that the Reserve Bank of India can cool the exchange rate by supplying dollars in the market.  When we take a look at the RBI stats, we are able to observe that there have been $23 billion declines in the Forex reserves since March-end. The Foreign Exchange Market of India is currently $400 billion. However, some economists are of the view that selling dollars can assuage the market just for a few trading sessions and after that, the free fall of the rupee in the international market will continue as before.  They call it a short-term solution and an additional burden on the economy.

3. Talk Down The Market

The third measure which many economists suggest to stop the devaluation of Indian rupee is to talk down the market.  They say in the current scenario when the value of rupee is falling, importers have a great opportunity to exploit the situation and rush in to purchase the dollars. On the other hand, experts will prefer to hold back on the expectation that the rupee will depreciate further.  The demand-supply matrix for international currency will exacerbate and degrade the value of the rupee further.  Many Economists believe that it is in the hands of the Reserve Bank of India to bring export earnings back to India on time and persuade importers not to rush into purchasing dollars in advance. If RBI fails to do so, according to economists, the value of the rupee against the US dollar will degrade further and perhaps to the extent of the irreversible damage.

4. Increase The Export/ Import Ratio

The fourth measure that the Government of India should take to stop the rupee devaluation is to increase the export/ import ratio.  It has been observed that small and medium business enterprises which have the major share in the export market often face tax refund issues. Economists say that RBI needs to sort it out with the first preference.

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5. Sort Out The Tax Refund Issue

If RBI is able to sort out the tax refund issue of the small enterprises, they will increase their exports which eventually will lead to at least some betterment in the value of the rupee against the US dollar,” said an economist.  “Government should focus on experts if it is serious in stopping the diminishing value of the rupee in the international market,” he added.

6. Hedge Oil Contracts

The prices of the oil in the international market are rising.  The government in collaboration with the RBI should hedge oil contracts and open a window to sell dollars. Hedging will streamline the purchase orders.

7. Limit Drawl Of Dollars For Travel And Other Purposes

Moreover, RBI should keep a close watch on the factors that increase the demand for the dollar like it had done five years ago.  The RBI should limit drawl of dollars for purposes like travel, education, and investment.   The drawl limit will force investors to take dollars out for investment as opportunities within the county will be limited.  RBI needs to monitor the capital flow proactively because the increasing inflow of FPIs impacts the currency value.

The motive behind this RBI move should address the fall in the rupee value.  The move that was a part of several steps taken by RBI in 2013 to stop rupee devaluation was aimed at bringing accounts of NRIs at par with the domestic term deposit accounts.

“The fund inflows from NRIs accounts will trigger a rise in demand for Indian rupee that will eventually make rupee stronger in the international market,” an RBI circular states.

According to an economist, this is one of the most important measures that RBI should take to manage the value of the rupee in the market according to the situation.

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Conclusion

This is how rupee devalued against the US dollar since 1947 till 2018. Hopefully, this write-up has covered all your questions regarding the recent fall of rupee against the dollar and you have got an answer to all of your questions.

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