Value of Indian Rupee against the US dollar: A journey in the making By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 21, 2016 | Posted by bobbysrinivasan << back to blog

Part II:

Now that we are at Rs. 67 (September 2016) against US dollar, where do we go from here. It is worthwhile to look into some of the factors that will affect the value of rupee. We will broadly classify them into several categories and then proceed to look one by one. Let us start with fundamental factors. It basically will include all such factors that will affect the basic economic and fiscal policies of the concerned government. Factors such as unemployment, capacity utilization, inflation rate, balance of payment, foreign reserves and liabilities against them, trends in export and import will all be relevant. In the case of India export of software, import of gold, imported oil price, food and cereal production will be the main factors.

Second are the political and psychological factors. Beggar they neighbour though devaluation, currency wars, hedge funds behaviour, political upheaval like what is happening in Brazil and Venezuela currently could play a vital role in the exchange rate policy of a country.

Yet another factor could be the differential in interest rate that can fix the value of the currency. Both Eurozone and Japan have negative interest rates while the US has positive interest rate. This has influenced their exchange rates.

Next factor is to consider the capital movement. This is a new development in the currency market. In nano seconds money moves electronically from one country to another country. This can have a big impact on the value of currency. The money need not move from the country but could move to another currency with in the country. When the Brexit result was announced (June 23, 2016), investors unloaded British Pound and bought US dollars. Within a matter of couple of hours the Pound took a massive hit dropping nearly 20% in value.

Maintaining the exchange rate within a range through official intervention by RBI has repeatedly entered into the currency market. This helped to smoothen the fluctuation of the Indian Rupee overtime. While RBI claims that their intervention is to smoothen the price movement, a possible intention could be to keep the exchange rate within a specific range.

Next factor is speculation. Just look at the volume in the Chicago Mercantile Exchange where currency futures and options are traded. Hedgers and speculators create very huge volumes. Public debt could also be considered as an important factor affecting the exchange rate especially if the debt is from abroad. Look at the fate of Argentina Peso, Venezuela Bolivar and Brazilian Real. In all these countries political and economic situations are quite scary. For example, the official exchange rate for Bolivar is 6 to a dollars while in the black market, it is fetching 6000 Venezuela is in no position to honour its foreign debt.

In summary the above are some of the reasons why the value of a country’s currency is affected. Let us in the next section see how these factors will affect the value of rupee in the next few years.

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