How Dollar Fluctuations Impact the Indian Economy

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How Dollar Fluctuations Impact the Indian Economy

By | October 2010
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To better understand the fluctuating dollar value against the rupee, let us get to know some basics:

Exchange rate – the rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another.

Foreign exchange market – Also known as “Forex” or “FX”. It is a market to trade currencies

Indian foreign exchange rate system – India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar

Why is the US dollar walking down? – When it comes to the US being a consumer, it has one of the largest appetites in the world. To keep up its demand for consumption, its imports are huge when compared to exports. This created pressure since there were more payments in dollars than receipt of any other currency, which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. This resulted in the depreciation of the dollar’s value, which again caused more outflow of dollar for import payments. This created a state of inflation and made consumables costlier to US. To control inflation US resorted to increase in interest rates to cool down pressure on demand side of consumption. This factor along with recession in all other sectors, particularly real estate, is causing the mighty US dollar to shake.

Impact of dollar fluctuations on the Indian economy

Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last...

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