Why USD Is Stronger ThanIndian Rupee?

A Report ByDeV KuMar

Introduction:-

Investors in all over world not only impacts the share market but the whole economic conditions of the country and it is observed that most investors started to believe that value Indian rupee will not be the same in world market as it is now. This is because of the fact that its value in comparison to the widely used currency in world dollar is decreasing consistently and therefore it is very important for the India to know and rectify the problems which causes it. This drop of value of rupee is from very long time (after independence of India) and so problems are seems to be chronic. People of India must be aware of this problem in order to minimize the problem. This subject of this project is one of the efforts to generate a detailed report about this problem.

History

Indian Rupee

India is the place where the concept of coinage developed at its earliest in around 6th century BC which later on built the base for other currencies of the world. According to the historians, the Indian currency i.e. rupee was brought into existence by Sher Shah Suri in the 16th century and it was evaluated as equal to 40 copper coins per rupee. The paper money was introduced under their reign in the latter part of the 18th century. Bank of Hindustan made the earliest rupee notes issues in the year 1770.

United State Dollar

The history of the dollar in North America pre-dates US independence. It began with the issuance of Early American currency called the colonial script, whereby the issuance of currency was equal to the goods and services in the economy. Even before the Declaration of Independence, the Continental Congress had authorized the issuance of dollar denominated coins and currency, since the term 'dollar' was in common usage referring to Spanish colonial eight-real coin or Spanish dollar. Though several monetary

systems were proposed for the early republic, the dollar was approved by Congress in a largely symbolic resolution on August 8, 1786. After passage of the Constitution was secured, the government turned its attention to monetary issues again in the early 1790s under the leadership of Alexander Hamilton, the secretary of the treasury at the time. Congress acted on Hamilton's recommendations in the Coinage Act of 1792, which established the dollar as the basic unit of account for the United States. The word "dollar" is derived from Low Saxon "thaler", an abbreviation of "Joachimsthaler" – (coin) from Joachimsthal (St. Joachim's Valley, now Jáchymov, Bohemia, then part of the Holy Roman Empire, now part of the Czech Republic) So called because it was minted from 1519 onwards using silver extracted from a mine which had opened in 1516 near Joachimstal, a town in the Ore Mountains of northwestern Bohemia.

Last 60 Years Exchange Rate Of INR To 1USD.

Year Exchange Rate of Usd

1960 4.7619 INR

1970 4.7619 INR

1980 7.5000 INR

1990 7.8610 INR

2000 17.4927 INR

2010 46.5758 INR

Today 26 th July Exchange of United State Dollar :-

1 us {$} Dollar = 44.4047 { } Indian rupees.

The Major Reason of Weakness of Indian Rupee Against United State Dollar :-

Every major development in Indian or world economy affects the Indian currency market. Long gone are the days of the fixedexchange rate regime, when corporate executives used to be ill-informed about international news, movement of oil prices or other factors influencing the currency market. Today, India follows the Liberalized Exchange Rate Management System (LERMS), under which it is absolutely essential for corporate executives to understand how the exchange rate moves, and why. Considering the large volume of transactions, a movement of even 2-3 paisa in the exchange rate can hit the bottom-line of any corporate. There are a number of instances when a sudden movement in the exchange rate has made companies loss or gain heavily in foreign currency transactions. There are several factors that influence the currency market. Some of the important ones among them, which have impacted the market recently, are discussed below:

Change of Interest Rate :- 1. The value of the currency of any country depends on the

interest rate of that country. In case of upward movement of interest rate in the United States, the US Dollar appreciates against other currencies as well as against the Indian Rupee. Any change of interest rate by the Federal Reserve Bank of New York through the Federal Open Market Committee has a great impact on the currency market. In the recent past there have been instances of rate hikes by the FED, as a result of which the USD had appreciated against major international currencies as well as the Indian Rupee.

Inflow of Foreign Funds :- 1. The exchange rate depends on demand and supply of

currency. Strong economic fundamentals and good ratings by international rating agencies have boosted foreign investors’ confidence in the Indian market. Huge foreign investments have already come to India, while big investments through Foreign Institutional Investors (FIIs) and Foreign Direct Investment (FDI) are expected in the near future. In the last couple of months, substantial foreign funds.

GDP ( Gross Domestic Product ) Growth Rate :-

1. Gross Domestic Product . The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

2. Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP.

3. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.

4. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

5. As economic growth is measured as the annual percent change of National Income it has all the advantages and drawbacks of that level variable.

6. But people tend to attach a particular value to the annual percentage change, perhaps since it tells them what happens to their pay check.

7. The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.

8. However, there are some problems in using growth in GDP per capita to measure general well being.

9. GDP per capita does not provide any information relevant to the distribution of income in a country.

India GDP Growth Rate:-

The Gross Domestic Product (GDP) in India expanded 8.20 percent in the fourth quarter of 2010 over the same quarter, previous year.

From 2004 until 2010, India's average quarterly GDP Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004.

India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services.

Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force.

The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points.

US GDP Growth Rate:-

The U.S. GDP growth has historically averaged about 2.5-3% per year but with substantial deviations.

US interest rate decision was released as expected holding interest rates at there current ultra low level of 0.25%.

More interestingly the press conference following the announcement was very dovish with officials opting to indicate that interest rates would remain at their current levels for the foreseeable future.

The market reacted with a significant bullish move from 1.65 in afternoon trade to 1.6750 by in the early hours of this morning.Today’s focus remained firmly on the US economy with the focus shifting from interest rates to GDP.

Figures indicated that the world’s largest economy grew at an annualized rate of 1.8% declining from a 3.1% growth rate in Q4 of 2011.

Gold Standard:-

1. The Encyclopedia of Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800s. A combination of the gold and silver standard is known as bimetallism.

2. India is the world's biggest market for gold, with demand for jewellery usually rising during festivals and marriages. In 2010, the country had imported more than 900 tons of gold, according to the World Gold Council.

3. Current assets of any country always remain constant. It depends on the value of the gold present on that country. The total currency and Gold will always remain constant. European countries and USA have more gold assets than India. So, Indian Rupee has less value than dollar.

Banking & Finance :-

have been infused into the Indian market. Since most of these have been in the form of USD, the supply of USD against the Indian Rupee became high, and it depreciated against the Rupee. On the other hand, at the time when FIIs wanted to withdraw funds from the market, the demand for USD in the Indian market became high, and it appreciated against the Rupee. During the last one to one-and-a-half years, the Indian rupee has shown a tendency to appreciate due to a huge inflow of foreign funds in the Indian market by FIIs or through FDIs in the form of External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCBs). A direct relationship may be drawn between the USD–INR exchange rate and the BSE index. Considering all other factors to be constant, whenever overseas FIIs buy shares from the Indian market, there is an upward movement of the BSE index. At the same time, due to inflow of foreign funds (foreign investors have USD to sell—they will buy INR to invest in Indian market against USD) in the Indian market, the supply of USD increases in the market and it depreciates against INR, or INR appreciates against USD. On the other hand, if there is any negative flow of funds by FIIs, there would be a downward movement of the BSE index, and consequently USD would appreciate against INR.

Price Of Oil :-

A large portion of India’s import payment is mainly for payment of oil. Internationally, crude prices are named as BRENT, NYMEX, and Dubai Crude. Whenever there is any hike in the oil price per barrel, the Indian Rupee depreciates against the US Dollar. As such, the Indian Government buys more USD against INR to honor the import liability, resulting in heavy demand for USD. Consequently, the Indian rupee

depreciates against USD. The Indian currency market largely depends on the price of Dubai Crude. It is observed that USD appreciates at the end of the month when compared to other days of the month, primarily because of the month-end demand of USD in the wake of payment for imported oil. However, today’s market is mature enough, with players of foreign exchange covering themselves against this type of expected fluctuations in the market. Whenever FIIs book profits by selling their shares, the BSE index falls, and at the same time INR depreciates against the USD.

RBI Intervention :-

The RBI, which regulates the Indian currency market, does intervene whenever it feels it is required to stabilize the market, or to keep market volatility under control. It is the responsibility of the RBI to keep the exchange rate unaffected at a time of volatility in the foreign currency market. It has been observed that RBI intervenes in the currency market whenever there is any abnormal movement in the exchange rate, either upward or downward. The RBI buys foreign currency (USD) to depreciate the domestic currency, and sells foreign currency when the domestic currency depreciates abnormally.

Export-Import :-

A county's exchange value depends upon its exports to other countries and developed nations like America are having better terms of trade than the developing nations like India as it commands more trade with world countries.The reason being they produce highly technical goods while

developing countries like India produce agrarian based goods which is not having better terms of trade, when the exports to other countries is more than imports then it means the foreign capital flows in, This is the one reason for our Indian rupee is weaker than US dollar.”

Example:-

1. Exports from India are of handicrafts, gems, jewelry, textiles, readymade garments, industrial machinery, leather products, chemicals and related products.

2. The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee.

Release of Economic Data :-

The economic data or surveys released by various national and international agencies, including FED, RBI, Moody’s, etc. can influence market sentiments and lead to movement in exchange rates. Some data from the US, such as GDP growth rate are known to influence the currency market.

Political Corruption:-

It is the shortsighted, selfish, political forefathers of Indian politics are also responsible for accepting the term of exchanging more rupees in exchange of one dollar. World is divided in two main segments viz.economically developed countries and under developed countries. India is still a developing country due to its vast population also. India attained its independence in 1947 which is a very youngest country in Asian region, India being one of the under developed country has to obey to dictates of monetary policies executed by the World Bank, and international monetary fund. India as a youngest country, since its independence it is begging before the world bank and IMF for loans for its various types of infrastructural development activities, therefore, the world bank and IMF which are mostly run by officers appointed by the developed countries from western world who are coming from rich developed countries naturally enjoy upper hand over the monetary issues like exchange value of their currency. Therefore, as of today 44.4047 Indian rupees are exchanged against one US dollar.

Conclusion:-

1. Commercial, financial and industrial activity; production and manufacture, exchange and distribution of goods or commodities; management of money and other assets.

2. 2.The United States has a highly advanced free-market economy. In a free- market economy, the prices of almost all goods and services are stated in units of money.

3. Government strategy and policy have long-lasting impact on country’s economy.

4. Based on the gold reserves possessed by the respective countries.

5. Annual economic review, RBI credit policy, monetary policy, etc. also strongly influence the currency market.

6. In rare cases Natural calamities also affect the value of currency.

7. Comments from political leaders and top bureaucrats do influence the market, but this is very short-term.

8. Strong Government, strong currency.

A Case Study By DeVKuMar