Why USD Is Stronger Than Indian Rupee?

A Report By

DeV KuMar Introduction:-

Investors in all over world not only impacts the share

market but the whole economic conditions of the country and it is observed that most investors started to believe that value Indian rupee will not be the same in world market as it is now. This is because of the fact that its value in comparison to the widely used currency in world dollar is decreasing consistently and therefore it is very important for the India to know and rectify the problems which causes it. This drop of value of rupee is from very long time (after independence of India) and so problems are seems to be chronic. People of India must be aware of this problem in order to minimize the problem. This subject of this project is one of the efforts to generate a detailed report about this problem.

istory
Indian Rupee

India is the place where the concept of coinage developed at its earliest in around th century !" which later on built the base for other currencies of the world. #ccording to the historians$ the Indian currency i.e. rupee was brought into e%istence by &her &hah &uri in the ' th century and it was evaluated as e(ual to )* copper coins per rupee. The paper money was introduced under their reign in the latter part of the '+th century. !ank of ,industan made the earliest rupee notes issues in the year '--*.

United State Do!!ar

The history of the dollar in .orth #merica pre/dates 0& independence. It began with the issuance of 1arly #merican currency called the colonial script$ whereby the issuance of currency was e(ual to the goods and services in the economy. 1ven before the 2eclaration of Independence$ the "ontinental "ongress had authorized the issuance of dollar denominated coins and currency$ since the term 3dollar3 was in common usage referring to &panish colonial eight/real coin or &panish dollar. Though several monetary systems were proposed for the early republic$ the dollar was approved by "ongress in a largely symbolic resolution on #ugust +$ '-+ . #fter passage of the "onstitution was secured$ the government turned its attention to monetary issues again in the early '-4*s under the leadership of #le%ander ,amilton$ the secretary of the treasury at the time. "ongress acted on ,amilton3s recommendations in the "oinage #ct of '-45$ which established the dollar as the basic unit of account for the 0nited &tates. The word 6dollar6 is derived from 7ow &a%on 6thaler6$ an abbreviation of 68oachimsthaler6 9 (coin) from 8oachimsthal (&t. 8oachim3s :alley$ now 8;chymov$ !ohemia$ then part of the ,oly <oman 1mpire$ now part of the "zech <epublic) &o called because it was minted from '='4 onwards using silver e%tracted from a mine which had opened in '=' near 8oachimstal$ a town in the >re ?ountains of northwestern !ohemia. "ast #$ %ears &'change Rate () I*R To +USD,
%ear +-#$ &'change Rate o) Usd .,/#+-I*R

+-/$ +-0$ +--$ 2$$$ 2$+$

.,/#+- I*R /,1$$$ I*R /,0#+$ I*R +/,.-2/ I*R .#,1/10 I*R

Today 2#th 3u!y &'change o) United State Do!!ar:

+ us 456 Do!!ar 7 )).)*)-4 6 Indian rupees,

The Ma8or Reason o) Wea9ness o) Indian Rupee Against United State Do!!ar:-

1very major development in Indian or world economy

affects the Indian currency market. 7ong gone are the days of the fi%ed e%change rate regime$ when corporate e%ecutives used to be ill/informed about international news$ movement of oil prices or other factors influencing the currency market. Today$ India follows the 7iberalized 1%change <ate ?anagement &ystem (71<?&)$ under which it is absolutely essential for corporate e%ecutives to understand how the e%change rate moves$ and why. "onsidering the large volume of transactions$ a movement of even 5/@ paisa in the e%change rate can hit the bottom/line of any corporate. There are a number of instances when a sudden movement in the e%change rate has made companies loss or gain

heavily in foreign currency transactions. There are several factors that influence the currency market. &ome of the important ones among them$ which have impacted the market recently$ are discussed belowA

:hange o) Interest Rate:'.

The value of the currency of any country depends on the interest rate of that country. In case of upward movement of interest rate in the 0nited &tates$ the 0& 2ollar appreciates against other currencies as well as against the Indian <upee. #ny change of interest rate by the Bederal <eserve !ank of .ew Cork through the Bederal >pen ?arket "ommittee has a great impact on the currency market. In the recent past there have been instances of rate hikes by the B12$ as a result of which the 0&2 had appreciated against major international currencies as well as the Indian <upee. The e%change rate depends on demand and supply of currency. &trong economic fundamentals and good ratings by international rating agencies have boosted foreign investorsD confidence in the Indian market. ,uge foreign investments have already come to India$ while big investments through Boreign Institutional Investors (BIIs) and Boreign 2irect Investment (B2I) are e%pected in the near future. In the last couple of months$ substantial foreign funds.

In)!o; o) <oreign <unds:'.

=D> ?=ross Do@estic >roductA =ro;th Rate:'.

Eross 2omestic Product. The total market value of all final goods and services produced in a country in a given year$ e(ual to total consumer$ investment and government spending$ plus the value of e%ports$ minus the value of imports. 5. 1conomic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product$ or E2P. @. Erowth is usually calculated in real terms$ i.e. inflation/adjusted terms$ in order to net out the effect of inflation on the price of the goods and services produced. ). In economics$ 6economic growth6 or 6economic growth theory6 typically refers to growth of potential output$ i.e.$ production at 6full employment$6 which is caused by growth in aggregate demand or observed output. =. #s economic growth is measured as the annual percent change of .ational Income it has all the advantages and drawbacks of that level variable. . !ut people tend to attach a particular value to the annual percentage change$ perhaps since it tells them what happens to their pay check. -. The real E2P per capita of an economy is often used as an indicator of the average standard of living of individuals in that country$ and economic

growth is therefore often seen as indicating an increase in the average standard of living.
+.

,owever$ there are some problems in using growth in E2P per capita to measure general well being.

4. E2P per capita does not provide any information relevant to the distribution of income in a country.

India =D> =ro;th Rate:The Eross 2omestic Product (E2P) in India e%panded +.5* percent in the fourth (uarter of 5*'* over the same (uarter$ previous year. Brom 5**) until 5*'*$ India3s average (uarterly E2P Erowth was +.)* percent reaching an historical high of '*.'* percent in &eptember of 5** and a record low of =.=* percent in 2ecember of 5**). India3s diverse economy encompasses traditional village farming$ modern agriculture$ handicrafts$ a wide range of modern industries$ and a multitude of services. &ervices are the major source of economic growth$ accounting for more than half of India3s output with less than one third of its labor force. The economy has posted an average growth rate of more than -F in the decade since '44-$ reducing poverty by about '* percentage points.

US =D> =ro;th Rate:The 0.&. E2P growth has historically averaged about 5.=/@F per year but with substantial deviations. 0& interest rate decision was released as e%pected holding interest rates at there current ultra low level of *.5=F. ?ore interestingly the press conference following the announcement was very dovish with officials opting to indicate that interest rates would remain at their current levels for the foreseeable future. The market reacted with a significant bullish move from '. = in afternoon trade to '. -=* by in the early hours of this morning.TodayDs focus remained firmly on the 0& economy with the focus shifting from interest rates to E2P. Bigures indicated that the worldDs largest economy grew at an annualized rate of '.+F declining from a @.'F growth rate in G) of 5*''.

=o!d Standard:-

'.

The 1ncyclopedia of 1conomics and 7iberty defines the gold standard as 6a commitment by participating countries to fi% the prices of their domestic currencies in terms of a specified amount of gold. .ational money and other forms of money (bank deposits and notes) were freely converted into gold at the fi%ed price.6 # county under the gold standard would set a price for gold$ say H'** an ounce and would buy and sell gold at that price. This effectively sets a value for the currencyI in our fictional e%ample H' would be worth 'J'**th of an ounce of gold. >ther precious metals could be used to set a monetary standardI silver standards were common in the '+**s. # combination of the gold and silver standard is known as bimetallism. India is the world3s biggest market for gold$ with demand for jewellery usually rising during festivals and marriages. In 5*'*$ the country had imported more than 4** tons of gold$ according to the Korld Eold "ouncil. "urrent assets of any country always remain constant. It depends on the value of the gold present on that country. The total currency and Eold will always remain constant. 1uropean countries and 0&# have more gold assets than India. &o$ Indian <upee has less value than dollar.

5.

@.

Ban9ing B <inance:have been infused into the Indian market. &ince most of these have been in the form of 0&2$ the supply of 0&2 against the Indian <upee became high$ and it depreciated against the <upee. >n the other hand$ at the time when BIIs wanted to withdraw funds from the market$ the demand for 0&2 in the Indian market became high$ and it appreciated against the <upee. 2uring the last one to one/and/a/half years$ the Indian rupee has shown a tendency to appreciate due to a huge inflow of foreign funds in the Indian market by BIIs or through B2Is in the form of 1%ternal "ommercial !orrowings (1"!) and Boreign "urrency "onvertible !onds (B""!s). # direct relationship may be drawn between the 0&29I.< e%change rate and the !&1 inde%. "onsidering all other factors to be constant$ whenever overseas BIIs buy shares from the Indian market$ there is an upward movement of the !&1 inde%. #t the same time$ due to inflow of foreign funds (foreign investors have 0&2 to sellLthey will buy I.< to invest in Indian market against 0&2) in the Indian market$ the supply of 0&2 increases in the market and it depreciates against I.<$ or I.< appreciates against 0&2. >n the other hand$ if there is any negative flow of funds by BIIs$ there would be a downward movement of the !&1 inde%$ and conse(uently 0&2 would appreciate against I.<.

>rice () (i!:-

# large portion of IndiaDs import payment is mainly for payment of oil. Internationally$ crude prices are named as !<1.T$ .C?1M$ and 2ubai "rude. Khenever there is any hike in the oil price per barrel$ the Indian <upee depreciates against the 0& 2ollar. #s such$ the Indian Eovernment buys more 0&2 against I.< to honor the import liability$ resulting in heavy demand for 0&2. "onse(uently$ the Indian rupee depreciates against 0&2. The Indian currency market largely depends on the price of 2ubai "rude. It is observed that 0&2 appreciates at the end of the month when compared to other days of the month$ primarily because of the month/end demand of 0&2 in the wake of payment for imported oil. ,owever$ todayDs market is mature enough$ with players of foreign e%change covering themselves against this type of e%pected fluctuations in the market. Khenever BIIs book profits by selling their shares$ the !&1 inde% falls$ and at the same time I.< depreciates against the 0&2.

RBI InterCention:The <!I$ which regulates the Indian currency market$ does intervene whenever it feels it is re(uired to stabilize the market$ or to keep market volatility under control. It is the responsibility of the <!I to keep the e%change rate unaffected at a time of volatility in the foreign currency market. It has been observed that <!I intervenes in the currency market whenever there is any abnormal

movement in the e%change rate$ either upward or downward. The <!I buys foreign currency (0&2) to depreciate the domestic currency$ and sells foreign currency when the domestic currency depreciates abnormally.

&'port-I@port:# county3s e%change value depends upon its e%ports to other countries and developed nations like #merica are having better terms of trade than the developing nations like India as it commands more trade with world countries. The reason being they produce highly technical goods while developing countries like India produce agrarian based goods which is not having better terms of trade$ when the e%ports to other countries is more than imports then it means the foreign capital flows in$ This is the one reason for our Indian rupee is weaker than 0& dollar.N 1%ampleA/
'.

1%ports from India are of handicrafts$ gems$ jewelry$ te%tiles$ readymade garments$ industrial machinery$ leather products$ chemicals and related products. The mentioned e%port items contribute substantially to foreign receipts. 2uring the periods when the dollar was moving high against the rupee.

5.

Re!ease o) &cono@ic Data:The economic data or surveys released by various national and international agencies$ including B12$ <!I$ ?oodyDs$ etc. can influence market sentiments and lead to movement in e%change rates. &ome data from the 0&$ such as E2P growth rate are known to influence the currency market.

>o!itica! :orruption:It is the shortsighted$ selfish$ political forefathers of Indian politics are also responsible for accepting the term of e%changing more rupees in e%change of one dollar. Korld is divided in two main segments viz.economically developed countries and under developed countries. India is still a developing country due to its vast population also. India attained its independence in '4)- which is a very youngest country in #sian region$ India being one of the under developed country has to obey to dictates

of monetary policies e%ecuted by the Korld !ank$ and international monetary fund. India as a youngest country$ since its independence it is begging before the world bank and I?B for loans for its various types of infrastructural development activities$ therefore$ the world bank and I?B which are mostly run by officers appointed by the developed countries from western world who are coming from rich developed countries naturally enjoy upper hand over the monetary issues like e%change value of their currency. Therefore$ as of today )).)*)- Indian rupees are e%changed against one 0& dollar.

:onc!usion:'. "ommercial$ financial and industrial activityI production and manufacture$ e%change and distribution of goods or commoditiesI management of money and other assets. 5. 5.The 0nited &tates has a highly advanced free/ market economy. In a free/ market economy$ the

prices of almost all goods and services are stated in units of money. @. Eovernment strategy and policy have long/ lasting impact on countryDs economy. ). !ased on the gold reserves possessed by the respective countries. =. #nnual economic review$ <!I credit policy$ monetary policy$ etc. also strongly influence the currency market. . In rare cases .atural calamities also affect the value of currency. -. "omments from political leaders and top bureaucrats do influence the market$ but this is very short/term. +. &trong Eovernment$ strong currency.

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