As we know, The US Dollar dominates the currency market of the world. It is also called the “International Currency” and it is the world’s reserve currency. The US Dollar is backed by the world’s largest gold reserves.
All the credits goes to the Bretton woods Agreement as it established the authority of central banks, which would maintain fixed exchange rates between currencies and the dollar.During World War 2 Delegates from 44 Allied countries met in Bretton Wood, New Hampshire, in 1944 to create a system to manage foreign exchange that would not be a disadvantage for any country.
This way the US Dollar started to dominate this currency world.
The exchange rate stability and lesser exchange rate between USD and INR is a positive sign. The depreciation of INR impacts the Indian economy negatively. It is discussed in detail in the blog below.
Firstly,Let’s take a look at the History of transition and fluctuations of INR to USD exchange rate and factors responsible for it.
Then we will understand about the factors which impact the exchange rate of any currency with respect to the US Dollar.
USD and INR Exchange rate over the period of time:
The exchange rate between the US Dollar (USD) and the Indian Rupee (INR) has seen significant fluctuations from 1997 to 2024, influenced by various factors such as economic policies, inflation, political stability, and global market conditions.
Key changes over the period are given as below:
1. 1947 to 1966 – Fixed Exchange Rate
- At the time of independence, the Indian Rupee was pegged to the British Pound, and the value of 1 USD was approximately equal to 1 INR. There were no significant fluctuations because of the fixed exchange rate system.
- This fixed rate existed under the Bretton Woods system, which allowed for fixed exchange rates between major currencies.
2. 1966 to 1971 – Devaluation of the Rupee
- In 1966, the Indian government devalued the Rupee by 57%, causing the exchange rate to rise to 1 USD = 7.5 INR. This was primarily due to economic pressures like rising inflation and balance of payments issues.
- The devaluation was intended to improve exports and control the trade deficit.
3. 1971 to 1991 – Managed Exchange Rate System
- Following the collapse of the Bretton Woods system in 1971, currencies, including the Rupee, began to float more freely, though India maintained a managed floating rate.
- The Indian government maintained tight control over the exchange rate, leading to gradual depreciation. By 1985, 1 USD was roughly equal to 12 INR.
- By 1991, just before the economic reforms, the exchange rate stood at around 1 USD = 17.90 INR.
4. 1991 Economic Crisis and Liberalization
- In 1991, India faced a severe balance of payments crisis, prompting the government to devalue the Rupee as part of a broader set of economic reforms.
- In two phases, the Rupee was devalued by around 20%. By the end of 1991, the exchange rate was 1 USD = 25 INR.
5. 1992 Onwards – Market-Determined Exchange Rate
- In 1992, India adopted a Liberalized Exchange Rate Management System (LERMS), which allowed for partial convertibility of the Rupee.
- By 1993, the Rupee was fully market-determined, and its value fluctuated based on supply and demand in the foreign exchange market.
- In the late 1990s, the Rupee saw steady depreciation, with 1 USD = 35–45 INR.
6.1997-2000: Impact of the Asian Financial Crisis:
- 1997: The exchange rate was approximately Rs. 36 per USD. India was relatively insulated from the full impact of the Asian financial crisis, but there were still some pressures on the currency.
- 1998-1999: The rupee depreciated a bit slightly, reaching about Rs. 42 per USD by 1999. India was facing mild economic challenges, including slower growth and fiscal deficits. Hence contributing to this depreciation.
- 2000: The exchange rate hovered around Rs. 44 per USD as India’s economic reforms continued to stabilize the economy.
7. 2001-2007: Economic Reforms and Rupee Stabilization:
- 2001-2003: The rupee remained relatively stable, fluctuating between Rs. 47-49 per USD. This period saw economic liberalization under Prime Minister Vajpayee’s government, as well as global economic shifts post-9/11.
- 2004-2007: A period of strong growth for the Indian economy. The rupee appreciated due to foreign investment inflows and better economic performance, reaching around Rs. 39-40 per USD by 2007.
8. 2008-2013: Global Financial Crisis:
- 2008: The global financial crisis caused the rupee to fall to around Rs. 50 per USD due to capital outflows and a weakening global economy.
- 2009-2011: The economy recovered, and the rupee stabilized in the range of Rs. 44-46 per USD.
- 2012-2013: The rupee experienced a sharp depreciation, reaching around Rs. 60 per USD in 2013. This was partly due to concerns over India’s fiscal deficit and high inflation, as well as the US Federal Reserve’s announcement of tapering its quantitative easing program.
9. 2014-2019: Modi Government and Economic Adjustments
- 2014-2016: The rupee continued to depreciate but at a slower rate, ranging between Rs. 60-68 per USD. Economic reforms, such as the introduction of the Goods and Services Tax (GST) and demonetization, impacted the economy.
- 2017-2018: The rupee saw some volatility due to global oil prices and trade tensions, falling to around Rs. 70 per USD.
- 2019: The rupee depreciated further, hitting around Rs. 72 per USD due to slowing economic growth and concerns over India’s current account deficit.
6. 2020-2024: Impact of the COVID-19 Pandemic and Global Market Uncertainty:
- 2020: The COVID-19 pandemic caused a sharp depreciation, with the rupee falling to Rs. 76 per USD at the height of the crisis, due to capital flight and global economic uncertainty.
- 2021-2022: As the global economy began to recover, the rupee stabilized somewhat, trading between Rs. 73-77 per USD, although inflation and rising global oil prices kept the rupee under pressure.
- 2023: The rupee further depreciated, trading at around Rs. 82-83 per USD. Inflation, rising interest rates in the US, and a strong dollar contributed to this decline.
- 2024 (projected): As of early 2024, the rupee is trading around Rs. 83-85 per USD, with persistent concerns over inflation, global geopolitical tensions, and India’s trade deficit likely to keep the currency under pressure.
Key Factors Influencing the INR-USD Exchange Rate Over Time
- Economic Reforms: India’s liberalization in the 1990s and subsequent reforms under various governments (e.g., GST, demonetization) played a significant role.
- Global Economic Crises: The Asian Financial Crisis (1997), the Global Financial Crisis (2008), and the COVID-19 pandemic had significant impacts on the rupee.
- US Monetary Policy: Decisions by the US Federal Reserve, especially around interest rates and quantitative easing, have influenced capital flows into and out of India, affecting the exchange rate.
- Trade and Current Account Deficits: India’s import dependence, especially on oil, has contributed to pressure on the rupee during periods of rising global oil prices.
- Political and Economic Stability: Investor confidence has been influenced by India’s political stability and its economic performance, especially in attracting foreign investment.
These are some of the reasons which are responsible for the fluctuations and exchange rate between USD and INR.
Impact of exchange rate of INR to USD in India:
A low USD to INR exchange rate, meaning the Indian rupee strengthens against the US dollar, can have both positive and negative implications for India’s economy:
Positive Impacts:
Cheaper Imports: A stronger rupee makes imports, especially of oil, electronics, and machinery, cheaper. This can reduce inflationary pressures since India imports a significant amount of crude oil, affecting transportation and manufacturing costs.
Reduced Foreign Debt Servicing: If the rupee appreciates, it becomes cheaper for India to repay its foreign debts, especially those denominated in dollars, reducing the burden on the government’s budget.
Boost to Indian Tourists Abroad: A stronger rupee benefits Indian tourists travelling to foreign countries as their expenses in dollars or other currencies become more affordable.
Negative Impacts:
Impact on Exports: A stronger rupee makes Indian goods more expensive in international markets, reducing the competitiveness of sectors like IT services, textiles, and pharmaceuticals, where India is a major exporter.
Lower Remittance Value: India is one of the largest recipients of remittances from overseas Indians. If the rupee strengthens, the value of remittances in local currency decreases, which could negatively impact the households dependent on these remittances.
Foreign Investment: A stronger rupee may reduce the returns on investment for foreign investors when converted back into dollars, potentially reducing foreign direct investment (FDI) or portfolio investments into India.
In nutshell, while a stronger rupee benefits importers and lowers inflation, it can hurt export-driven industries and reduce remittance values, creating a mixed impact on the economy.
Future Outlook of INR as compared to USD:
The future of the Indian Rupee (INR) compared to the US Dollar (USD) will be influenced by various economic, geopolitical, and market factors. Several factors can provide insights into the possible direction of INR in comparison to USD over the coming years:
1. India’s Economic Growth:
India is expected to continue its trajectory as one of the world’s fastest-growing economies. Factors such as a young population, rising middle class, digital transformation, and government initiatives like “Make in India” and infrastructure development can bolster economic growth. If India can maintain strong GDP growth rates, the INR could strengthen or stabilize relative to the USD over time.
2. Inflation and Interest Rates:
Inflation in India tends to be higher than in developed economies like the US. If inflation remains persistently higher in India, it could erode the purchasing power of the INR. Additionally, the Reserve Bank of India (RBI) may need to maintain higher interest rates to control inflation, which could affect capital inflows and, by extension, the INR’s value.
3. Trade Deficit and Current Account Balance:
India has a significant trade deficit, especially due to its reliance on imported oil and other commodities. A persistent trade deficit can put pressure on the INR. However, efforts to increase exports, especially in technology and services, or to reduce the oil import bill by diversifying energy sources, could mitigate this pressure.
4. US Federal Reserve Policy:
The USD is affected by the US Federal Reserve’s monetary policy. If the Fed raises interest rates, it could strengthen the USD, as investors seek higher returns. Conversely, if the Fed adopts a more accommodative policy, it could weaken the USD, making the INR relatively stronger.
5. Global and Domestic Political Stability:
Geopolitical events, trade relations, and domestic political stability in both India and the US will also influence currency exchange rates. Political reforms or instability in India could affect foreign investment inflows, which are crucial for the INR’s strength.
6. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI):
India’s ability to attract foreign investment will play a major role in determining the INR’s performance. Policies that promote ease of doing business, economic liberalization, and openness to foreign investors could support the INR by increasing capital inflows.
7. Dollar Strength:
The USD tends to be strong during periods of global uncertainty, as investors seek safety in US assets (e.g., US Treasuries). As long as the USD maintains its status as the world’s primary reserve currency, it will have an advantage over most other currencies, including the INR.
Overall Outlook:
In the short to medium term, the INR may face periods of depreciation due to factors like inflation, oil prices, and global economic conditions. However, in the longer term, structural reforms, improved fiscal health, increased exports, and strong economic growth could lead to a more stable or even stronger INR relative to the USD.
That said, the INR is likely to continue experiencing volatility, but the extent of its depreciation may reduce as India becomes a more integrated and developed economy. The USD, however, will continue to remain a dominant global currency, making any significant appreciation of the INR against the USD unlikely unless drastic global economic shifts occur.