The Indian Rupee and US dollar
Being an Indian we all want the dollar to become equal to 1 rupee just because we believe that stronger currency= stronger economy. Let’s consider a parallel universe where one day we wake up and realize that rupee is now valued the same against the dollar. Will we all feel much more empowered? Is this good for the economy? Does the value of currency determine the strength of the economy? Let’s see what will happen if 1 USD equals 1 INR?
First of all currency value is not equal to the strength of the economy if this would have been the case then Bangladesh would have had a stronger economy than Japan because 1 Bangladeshi Taka=1.4 Yen.
Pros of the situation:
- With stronger rupee imports would be cheaper; you could now get the latest iPhone for just 1000 INR. So everyone would own an iPhone if 1 USD equals 1 INR
- Buying goods from other countries in an international market will be cheaper which is beneficial for a developing country.
- Crude oil prices would go down considerably which we import the most, thus the price of petrol and diesel will fall making the transportation cost cheap if 1 USD equals 1 INR
- As the transportation cost would reduce the products that are made in India would be cheaper and easily available to buy.
- One would not travel abroad for a job. For example, if they get 3000$ abroad that will just be equal to 3000 INR. So what’s the point of traveling? But there is another side to it too.
But now with one billion people demanding the same finite products now, their wealth will increase 66 times overnight, prices will begin to rise. There are only so many iPhones that apple can produce. Soon our currency would go back to previous levels but not without having wreaked havoc on the economy because imports would increase a lot and that’s not good for the economy.
Cons of the situation- 1 USD equals 1 INR
- Full stop on exports- we can export goods just because of the currency difference. The exports will become expensive and if we compare Indian products if with other competitive countries, we will become way more expensive and all this will hamper our exports which is not good for our economy.
- No foreign investment: foreign companies invest in India due to cheap labour now if a company used to pay the worker Rs20000 that is 300$ now they have to pay them 20000$ so they would start investing in other countries rather than in ours if 1 USD equals 1 INR
- We will face economic shutdown and increase in unemployment for example if my company heirs an engineer from India for Rs75000 that is around 1000$ and if 1INR = 1 $ why will I pay so much more to the Indian engineer when I have options. So, the Indian workers have to work on less cost or leave the job. The same would happen with other professions also.
- If they are working on so much lower wages how would they pay their EMI? They couldn’t. Unemployment will affect the banks as loans would be left unpaid
- We will face economic slowdown as money would not be traded at the same pace if 1 USD equals 1 INR
Today our motive is not to lower down the exchange rate we just need stability for our currency. For a developing economy a very strong currency is not always beneficial and market forces would step in to correct the price revision in the long run. Yes it is good for a currency to get stronger over time but not suddenly as shown here. It should happen through increased productivity and innovation that drives our exports. It is good to have a weaker currency if you have strong natural resources and the raw material to produce the goods which you can then export.
In 1947, when India got freedom one dollar was equal to 1 rupee but now 1 dollar is equal to 75.66 rupees. Here’s a look at the journey of the rupee sliding path since independence.
Why did the Indian rupee devalue against the US dollar?
US dollar is known to be one of the most valuable currencies in the world because USD is the most traded currency in the world. The three major commodities that are exchanged in the global market are gold, silver, and crude oil. All of them are exchanged in USD. For example, oil from Saudi Arabia is imported so the United States made a deal with them that and all its transactions will be made in the dollar and in return will provide them protection in their oil reserves.
Now we all know that more the country exports more profit we get that is profit is directly proportional to export which increases the demand and supply of the USD in the global market. On the other hand in India, we are import things from other countries more rather than exporting that decreases the demand for our currency and affecting its pricing.
Many geopolitical and economic factors affected the Indian currency some of them are:
1. Foreign Borrowings:
After independence when the British left our economy saw a lack of capital and till then we did not witness any foreign borrowings. So the government borrowed money from other countries between the 1950s to 1960s especially from Russia then 1USD was equal to 4.75 rupees.
2. War with China and Pakistan and drought:
On one hand, we were already reeling under budget deficit as we had a negative rate of saving also we couldn’t borrow more and on the other hand India faced two major consecutive wars, against China and Pakistan in 1962-1965 which devalued the currency to 7.57 against the dollar. Also in 1966 huge drought crippled the production capacity leading to inflation
3. Global factors and political instability:
In 1971 the rupee link with British currency broke and was directly linked to the US dollar. Just after this in 1973 Organization of Arab Petroleum Exporting Countries (OAPEC) decided to cut the crude oil production which increased the oil import bill. Lack of growth and scams held back our economy. In 1984 Indian Prime Minister Indira Gandhi was assassinated which reduces the confidence of other countries in the Indian economy. All this together brought the exchange rate to 1 USD was equal to 12.34 INR and in 1990 it became to 1 USD =17.50 INR.
4. 1991 economic crises:
One of the toughest times for our Indian economy was 1991. We faced a serious balance of payment, no revenues to meet the payments of imports, high inflation, low growth, and interest payment was around 40% all this resulted in further devaluation and the exchange rate became 1 USD=24.58 INR.
5. Annual Depreciation:
In 1993, the government decided to unify the foreign exchange rate that is rupee was allowed to float. Now the exchange rate was free to be determined by the market-then again rupee lost more ground and fell to Rs 31.37 against a dollar. In the next few years, depreciation was close to 5% and by 2002-2003 1 USD was equal to 48.40 INR.
7. Depreciation in 2013 and demonetization
On May 22, 2013, the Indian rupee was 55.48 against the US dollar and in less than 15 days it was 57.07 against the dollar. The main reason behind this was the increase in imports as our population was increasing rapidly we needed more resources and as a result, imports increased. In 2016, the government removed the old currency notes and exchange them with the newer bills that is demonetization happened and it ended up bringing INR to a range of 67-71 in the following years.
Now we are facing huge crises of COVID-19, the nation could face an economic crisis, high inflation, and serious unemployment resulting in the further downfall of the rupee. We now need bold steps to change the direction of our economy.