Have you ever wondered why the value of US Dollar keeps changing every day against Indian Rupee?
Who determines USD-INR rates?
No single institution or government determines the exchange rate of rupee not even the central bank. India has a floating exchange rate system where the exchange rate of the rupee with another currency is determined by market factors such as supply and demand, inflation in country, interest rates, amount of public debt, economic stability & international oil prices.
The Indian rupee, along with the Japanese yen, Pound sterling, Brazilian real and other Asian currencies have all fallen sharply against the dollar in the last few months due to COVID-19 lockdown & slowdown in economic activities. This is despite the sharp interest rate cuts by the US Federal Reserve.
Historically, we have seen that Indian rupee is very volatile to global events. The domestic currency had depreciated by 33% approximately against the dollar between 2008-09 financial crisis, 30% in 2011-12 Asian crisis, 28% in 2013-14 and around 18% between 2018-19. Considering various challenges on the internal and external fronts there is still a further possibility for steep depreciation in the Indian rupee.
Since beginning of 2020, the Indian rupee has depreciated by nearly 7% to 76 level against the dollar in the fear that world might have entered a recession.
Rupee’s relation with falling OIL prices
India is the world’s 3rd largest oil importer & every dollar drop in the price of oil decreases the import bill by ₹10,700 crore on an annualized basis. We import 82% of required oil, which adds pressure on the government borrowing & our current account deficit.
As OIL is denominated in dollar terms, it has always shown inverse relation with rupee and other world currencies. Being a net importer, any fall in the international oil prices results in low economic pain, reduction in import bills & stronger rupee.
What’s future ahead?
The Indian market has entered the new financial year and it needs to face the slowdown as we are not protected from the recessionary impact at least for the April-September quarters. Also, India has crossed the lock-down period allowing economy to open slowly, but the number of infected cases and deaths have been continued to rise.
RBI has intervened in every possible way to cut the outflows from the Indian market and to prevent fall in the rupee. Despite that, the rupee hasn’t sustained the strength as there is overall dollar demand and buying pressure by importers.
The lockdown has affected various industries across various sector, at this time it is difficult to say how deep the fall in markets and currency continue. The rupee shall remain less volatile in coming quarters but since the demand for dollar remains firm and outflows continue, there is a higher possibility for the rupee to move towards 77 – 78 levels in the coming months. In addition, if international crude oil prices remain at these low levels, the rupee is expected to get support at current levels.
A fall in rupee will make exports cheaper and thereby competitive in global trade and making imports costly. On 12th May 2020, rupee traded at 75 level against dollar.