The Story behind DOLLAR-RUPEE RATE

‘Indian Rupee falls’ or ‘Indian Rupee gets slightly high’ – these kind of headlines aren't new to anyone who reads news. Although it sounds complex, it isn’t really so. The basis of dollar-rupee exchange rates is quite simple. It is similar to the demand and supply of a simple commodity, say wheat. When there is more supply in the market, the price is low and when the demand is high the price increases.

The supply of dollars to Indian market can be categorized basically into three types – first, the Indian exporters who sell their products and services at International markets in lieu of dollars, second, the Indian immigrant workers abroad who repatriate money to their family back home and third, the foreign investors who invest in Indian institutions. Foreign tourists who visit India also contribute a small part of the huge dollar inflow. The factors that demand for dollars are just the mirror images vice-versa of the factors that contribute for its supply. The factors that stand for the demand of dollars are importers who spend dollars, individuals or companies repatriating home countries their earnings and Indian individuals investing in foreign stocks.

There are many reasons for the deficit in Indian rupees value as compared to dollar. There has been a huge trade deficit gap between our imports and exports. Our exporters are able to earn only a minute part of the dollar that importers need. The foreign investors who were flooding the stock exchange with billions of dollars have now started to divest their money because of financial crisis in their home market.

There are also numerous historic reasons for the depreciation of the rupee value as compared to dollar. Although unbelievable it’s a fact that during independence Indian rupee was at par to US Dollar. India had no foreign borrowings then. Indian Government’s decision to introduce finance welfare and development issues through the five years plans in 1951 led to the first borrowing. 1948-1966 faced fixed rate currency stage at 4.79 against a dollar. Two consecutive wars in 1962 and 1965 led India to a financial deficit and rupee value was marked at 7.57 against a dollar.  By 1985 the value dropped to 12 rupees against a dollar. In 1991 India faced payment crisis, high inflation and low growth. The rupee value against dollar was devalued to 17.9. In 1993, the rupee dollar rate determination was made free and left at market conditions. The exchange rate was left to be determined by the market but would be interfered by Reserve bank of India under extreme volatile cases.

Today rupee value has degraded even further. Indian currency has been gradually depreciating after 2008 economic crisis.