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Dollar Vs Rupee: A Blame Game

Created on 18 Oct 2022

Wraps up in 5 Min

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Updated on 01 Dec 2022

Dollar Vs Rupee Insider by Finology

People will often tell you that the Indian rupee was equal to the dollar in the year 1947. That’s not true, however, as the rupee was never equal to the dollar.

When India gained independence, the country followed a fixed exchange rate where the economy attached the currency’s value to the American dollar. This was a way to help the rupee grow with the developed country’s currency appreciation.

Dollar vs INR

Ever since then, when compared to the dollar, the rupee has only fallen in value. In fact, in 1993, when India started following the floating currency method to value the rupee, its value experienced the first-ever drastic fall. The rupee went from ₹17.9 per dollar to ₹31.7 per dollar.

Today, as the rupee fell to an all-time low of ₹82.83 against the dollar, the reality of the situation is still foggy. People are left wondering if the rupee is falling or if the dollar’s growth is causing our currency to look relatively worse.

To add fuel to the fire, the FM, in a recent tour to the US, made a somewhat controversial statement about the comparative values of the currencies.

So what did the FM mean? Was she correct? Let’s understand the reality of the situation.

The constant fall of the rupee against the dollar - Insider by Finology
The constant fall of the rupee against the dollar

Nirmala Sitharaman on Rupee: Deconstructed

“First of all, I would look at it as not rupee sliding, and look at it as dollar strengthening…dollar strengthening incessantly.” This line sent the opposing party and netizens into a fury of adverse comments and memes.

Rahul Gandhi Tweet about Rupee - Insider by Finology
Political aspects aside, one can see how the statement could have been received poorly

To better understand the statement, we first need to understand the two aspects presented in it. The Indian rupee and its fall in value, as well as the dollar and its meteoric rise.

So, is the Rupee really struggling? Compared to the dollar, yes, it is. However, the Indian economy seems to have faired the best compared to the other economies sliding down this “slippery slide”.

Don't believe that? Here are some numbers to back this claim. While the rupee depreciated by 2.6% for the period beginning in September 2022, the Great Britain pound and Chinese yuan depreciated by 5.75% and 4.15%, respectively.

The Korean won suffered the most as it faced a depreciation of 5.97%.

The reasons for the US dollar strengthening are multiple, with some of these reasons not being the most positive. Let us find out what exactly happened with the dollar.

The Reason behind the Dollar’s Rise

So far this year, the US dollar has experienced a rise of around 17%. Let us see the various stages of the greenback’s sky-high ride.

1. Investor’s Stability: In the face of the Covid-19 pandemic and geopolitical tensions around the Russia-Ukraine war, most of the commonly traded foreign currencies became unstable investment options.
The US dollar, on the other hand, with its geographical, economic and political distance from the turmoils, led it to become an island of hope for investors.
As a result of this stability, the demand for the dollar as an investment instrument rose, causing its value to go up as well.

2. Internal Inflation: The pandemic led the average US citizen to save more as supply chain disruptions led to shortages of store inventories. Most spending was directed towards necessities.
However, when the lockdown restrictions were lifted, the same average citizen’s savings turned into increased spending potential. A potential that the still-recovering industry could not keep up with.
As a result, the money which was abundant with the consumer lost its value compared to the commodities they wanted, which were scarce. The basic amenities of food, shelter and energy experienced a price increment of 10.4%, 5.6% and 41.6%, respectively.

3. Interest Rate Hike: With inflationary pressure bearing down on the US economy, the Federal Reserve System decided to increase the interest rates to reduce the liquidity with the general public.
The federal funds rate went from near zero at the beginning of 2022 to a range of 3.00% to 3.25% by the September FOMC meeting.
This increasing interest rate gives another edge to the dollar as a lucrative investment option, which leads us back to the first step of this whole mess, and the cycle keeps feeding and repeating itself.

So yes, the rupee is struggling when compared to the dollar but is among one of the currencies that got off the hook easy. Also, the dollar is indeed rising at an alarming rate.

If the interest rates and inflation are not curbed in time, the US economy, as well as other global economies following similar remedies to recovering from Covid, might spiral into a downward slope of recession.

Now, as an everyday consumer, you might be wondering, “So the Indian economy is doing just fine, and the US economy may be on the brink of recession. To main kya karun?”

While the currency affair is quite distant from the worm’s-eye-view of everyday consumers, “Global is the new local”. So you should give a damn.

Dollar vs Rupee’s Effect on the Indian Economy

We have seen what caused the dollar to rise from the US’ perspective. Now let us see what it will do to the average Indian Joe.

Imports: Imports will be a pain point for the Indian economy as a strengthening dollar would mean that the cost of raw materials sourced from international markets rises. Crude oil, metals and semiconductors being major reasons for higher import spending.
The burden of this increased cost will inadvertently have to be borne by the final consumers of the products that these inputs go into. Therefore, the Indian economy will also face inflation due to the dollar going on a rocket ride.
So how is that future iPhone purchase looking right now?

Exports: Based on personal experience, I have come to learn that whenever the imports of a country suffer as a result of any economic change, exports usually flourish. The learning stands true in this situation too.
The fall of the rupee would make the Indian industry’s production a more economical option when compared to global competitors.
The stronger dollar could also attract investments from the US, increasing India’s supply of valuable foreign currency.

The Bottom Line

As the concept of currency has developed over time, it has undergone multiple versions to reach its current form. With the current form of currency, its true value can be gauged only when compared to another currency.

After the pandemic, many European countries were poorly affected by the Russia-Ukraine war, with an increase in the price of power playing a major role in these countries experiencing inflation. Their approach to remedy this situation is similar to the US, which threatens the global economy with a recession approaching.

While the memes were hilarious, and the current global economic conditions have turned into something of a blame game, it doesn’t hurt to stay informed. What do you think the Indian Government can do to stave off a possible global recession?

Other than pointing fingers…

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Deb P Samaddar

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Deb is a keen learner and eager to learn about the finance world. He is that person who would never stop talking, but my oh my, the words he uses, are not something a normal human would in a regular conversation. While the conversations are well, interesting, the write-ups are faultless. With an increased proclivity towards tech and language, he aims to capitalise on his interests as a content writer at Finology.

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