Who Decides The Value of Our Currency?

Value of Our Currency
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We all know that the Indian Rupee is depreciating. Ever wondered who is pulling down the value of the rupee? Today, let’s dive deeper to explore the science behind it.

What’s Happening?

Let’s recall the olden times. You will be surprised to know that in 1991 the Indian rupee was valued at Rs 22.74 against 1 USD. A decade later, in 2001, the rupee was valued at Rs 47.19 against 1 USD. In October 2022, the rupee touched an all-time high of Rs 83.26. 

Our Finance Minister, Nirmala Sitharaman, not too long ago, made a fascinating comment. She said, ‘The rupee is not sliding; I would look at it as the dollar strengthening.’

So, is the dollar the one who decides the value of our rupee? Yes, to some extent. But, as we said earlier, there is a science behind it. 

Who Decides The Value of Our Rupee?

Interest Rates

What would you do when you know that an instrument’s interest rate has recently risen? The answer is evident. We will withdraw our surplus money from one asset class and park our funds where we will get maximum assured returns. 

Similar is the concept here. The US Fed is consecutively hiking interest rates, making the US dollar a lucrative investment option. Huge investors from across the world are withdrawing money from other countries and investing in the US, leading to a stronger-than-ever dollar. Hence, the RBI also has to hike rates, so investors don’t withdraw funds from our country. 

Trade

Because huge investors are withdrawing and investing in the US, there will be a dollar crunch worldwide, resulting in high demand. A country with high exports and low imports will end up with surplus dollar deposits. So, they won’t have to spend their local currency to buy dollars from the market. Hence, their currency will appreciate against the US dollar. 

But that’s not the case with India. We import more than what we export. Our currency is dependent on the US dollar to settle our import bills. So if we were to buy dollars amidst a dollar crunch, we would have to pay more of our Indian rupee to buy the US dollar, which puts pressure on our currency. 

Monetary Policy

The value of your Rs 500 note keeps changing every day because the Reserve Bank of India buys and sells various currencies to maintain control of the demand and supply of the rupee so that its value stays intact. Moreover, monetary policy changes, like the repo rate or the liquidity ratio, also affect the rupee value. 

How Will a Change in the Value of Rupee Affect You?

If you are planning to study abroad, then with every fall in the value of the rupee, you will have to pay higher tuition fees, and your cost of living abroad will also increase.

In the calendar year 2022, the Indian rupee depreciated by 9.8% against the US dollar. Hence, our imports would become expensive. 

Lastly, every time the value of the rupee falls, it will stealthily burn a hole in your pocket. 

That’s it for today. Don’t forget to share this article with your friends.

 

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