Importance of Dollar-Rupee exchange rates

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On 9th march, 2020 the Indian rupee fall to 16 paisa and reached to rate of 74.4 INR against the US dollar. The rupee opened weak at 73.99 against dollar at the interbank Forex market and then fell further to 74.03 which will lead to heavy sell-off in the equity market . The rupee fell as much as 0.41% to a new record law of 74.50 against the U.S. dollar. According to K. Harirar of first rand bank, “the rupee is under pressure and there won’t be any immediate respite”.

Further, it has been said that the Indian rupee witnessed heavy volatility and depreciation after cases of covid -19 (corona virus) were reported in country.

Significance of this developmet

  • IMPACT ON GROSS DOMESTIC PRODUCT

Increased input cost due to weak currency may impact the profit margin of various companies.

Higher inflation affect short term growth prospects of the economy.

  • INFLATIONARY PRESSURE

High cost of commodities will exert pressure on overall economy. It will affect all sectors of the economy.

  • COSTLY IMPORT- India’s import will get costlier as we would have to pay more for the products from importers trading in US Dollars.
  • BURDEN ON CORPORATES

Corporates may face additional burden on interest cost when banks increase rates. This may impact foreign investors in the stock market.

  • INCREASE IN TRADE DEFICIT

India’s import being more than exports, there is a potential for an increase in the existing trade deficit.

  • FOREX SWAP

RBI (reserve bank in India) announced $2 billion in forex swaps to provide dollar liquidity to the forex market. 

Factor affecting Rupee-Dollar exchange rate

  • High commodity prices for US commodity
  • Price rise of crude oil – India depend on import of crude oil, weak currency would lead to high price of imported crude oil.
  • US Federal reserve– It has raised its interest rate which has impacted India and other growing economies.
  • Tighter monetary condition in U.S
  • Rising import bill – by the United States, therefore further affecting trade.

Significance for trade and inter relation.

Costly import-export – The weakening rupee makes crude oil, iron ore, fertilizer, medicine and iron ore costly, which India imports in large quantity. In case of crude oil, a weak rupee will influence the price of diesel and petrol significantly.

Price of Domestic Goods –  Fuels being directly connected with the cost of transportation, prices of goods that are transported from one part of the country to another, such as food, are bound to rise. This will also have a direct impact on household budgets.

Impact on fast moving consumer goods – fast moving consumer goods such as soap detergent, shampoos, and deodorants, of which crude oil is an input, are likely to become more expensive.

Imports from India – Imports from India will become significantly cheaper for US as they enjoy maximum advantage. Each time there is a fall in rupee against US dollar, exporters from India like software companies, seafood exporter etc. are benefitted.

Probable future

Mr. V.K. Sharma, Head of HDFC Security said that the ”US dollar- Indian rupee is expected to remain under pressure amid weaker economy data and foreign fund flows”. Meanwhile, number of death globally in the covid -19 outbreak passed 3000.

According to ING Bank – the rupee may fall to as low as 75 rupee against dollars, surpassing the record low hit in October, 2018. Meanwhile, as on 4th march, India has so far reported 28 positive cases of corona virus. The currency had stayed relatively stable earlier in the absence of cases of Corona virus in the country.

An unexpected rate cut from US Federal Reserve, will further affect Indian currency in near future. According to Prakash Sakpall, economist at ING group NV in Singapore, ”the dollar-rupee pair has moved to a higher trading  range of 72-75”.

Conclusion

The value of currency mainly depends on the productivity and gold reserve of that nation. In 1947, 1$ was equal to 1 rupee. Later, America welcomed entrepreneurs and invested in research and  development.

After closely monitoring the global situation reserve bank of India should take all necessary measures to ensure that market remain adequately liquid and stable. Reserve bank of India should ensure that all money, debt and Forex market remain adequately liquid.

Author: Urvashi Tyagi from Guru Gobind Singh Indraprastha University, Delhi.

Editor: Anna Jose Kallivayalil from NLU, Delhi.

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