Why Indian Rupee is Falling Against The US Dollar

Why Indian Rupee is Falling Against The US Dollar
Written by Harshal

Why Indian Rupee is Falling Against The US Dollar

The Indian rupee experienced one of the most pronounced declines in 2018 where the currency has lost 8% of its value. According to Rajnish Kumar, President of the State Bank of India, he believes the currency would stabilize in this 2019 at around 69-70 dollar to rupee, the Press Trust of India news agency reported.

The Indian rupee was the most punished currency in 2018 in the Asia-Pacific region with a fall to its historical lows: 73.78 rupees to the dollar.

Why Does Rupee Fall Against Dollar?

The increase in oil prices, with a Brent that has reached 85 dollars per barrel, is one of the factors that is most punishing the currency. India imports more than 80% of the crude it needs. When the oil payment is linked to the dollar, the rise in the price of the barrel strengthens the US currency and passes a bill to the rupee.

In addition, sanctions on Iran suggest that this increase in oil prices will rise, which is bad news for the Indian currency and for the current account deficit of the country. Precisely the deficit is another of the major concerns of the Government of Narendra Modi.

In the first fiscal trimester, it has expanded by 15,800 million dollars and already accounts for 2.4% of GDP, compared to 1.9% of the previous trimester. The forecast is that this gap in the current account balance will continue to widen and, therefore, the depreciation of the value of the rupee will continue.

To all this is added the international strength of the dollar and the rise in interest rates of the Federal Reserve, with the consequent effects on the currencies of emerging markets. The increase in the performance of the US bonds will serve as an incentive for foreign funds to invest their money in the North American country, where they will obtain higher yields.

This will lead to an outflow of foreign funds from the Indian market. That is, bad news for the rupee while the green note continues to strengthen, it can be a USD to INR forecast.

All these reasons could cause the central bank to raise interest rates. Meanwhile, the market monitors how it deals with the issue of liquidity and whether it changes the inflation forecasts.

Reason Behind Rupee Fall Against Dollar

As we mentioned before, the Indian rupee had a significant fall against the dollar and other reasons are due to the complicated political situation that Turkey has gone through in the last period as it has faced an economic problem with roots in the economy of the country. President Recep Tayyip Erdogan who faced arguments with the United States due to commercial issues, caused the devaluation of the rupee, increasing the cost of imports, particularly oil.

This situation has not only affected India, but the bad moment of Turkey also affected in the last year to the currencies of South Africa, Argentina, Mexico, Brazil and Russia, countries particularly dependent on foreign capital.

Even so, the Secretary of Economic Affairs Subhash Chander Garg has declared that there is no problem for India after the rupee has lost 8% of its value since the country has foreign reserves that can support and deal with this devaluation, also, he did not want to give a deep explanation or reasons that why this was happening.

On the other hand, from the ranks of nationalist Bharatiya Janata, the People’s Party of the Prime Minister, Narendra Modi, appeals to the strength of the Indian macroeconomic picture and recalls that the weakness of the rupee is, in the end, a global correction of the dollar against the rest of currencies.

At the same time, Modi affirms that the Indian currency is less exposed than the Turkish lira or the Argentine peso, countries with higher debt levels.

1 Dollar to INR in 1947

According to some sources, they have reported that in August 1947, the Indian rupee was worth 1 US dollar. However, other sources have denied the information saying that it was not correct since 1 dollar in 1947 was not equal to 1 rupee.

When India became independent in 1947, external borrowings did not exist so the value of the rupee was on par with the dollar. As India was ruled by the British, the rupee was linked to the Pounds, resulting in 12 rupees to 1 pound between 1927 and 1966, until finally, the rupee was devalued and linked to the dollar with a value of 1 dollar for 7.5 rupees, value that prevailed until 1971 when the American dollar was devalued.

At that time, as the rupee was linked to the pound with a value of 1 rupee for 1 shilling and 13 rupees worth about 1 pound when the pound was worth 4 dollars. According to these figures, it is believed that the exchange rate USD to INR in 1947 had a value of up to 3 rupees. Check USD to INR History.

 Indian Rupee Falling Down

New Delhi plays between two turbulent fires. Those of the commercial war between the two largest economies on the planet: The main industrialized and the great emerging. Hence, in the market consensus, it is said that the worst of the rupee crisis is still to come.

According to analysts, the declaration of hostilities on free trade is closely linked to the weakness of emerging market currencies. Also of the rupee. Because, in parallel, the dollar is strengthening which, together with the rise in the price of oil, in economies with high rates of dynamism, a strong external sector and crude-dependent, such as India, leads them to flagrant imbalances and flashes of their current deficits.

That is, of their imperative financing needs. In the medium term, the objective of the Indian central bank should be the sustainability of its exchange rate, around 75 rupees per dollar, although there has been some recovery jump, such as what happened in 2018 in which it had a value of 71.6 rupees, explain from the Rabobank study service.


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