International business in India is of prime importance because it has an important role in India’s economic growth. Not only does it enhance competitiveness, and expand business opportunities for domestic markets, but it also is crucial for the exports and imports between India and other countries.
Right from the time of independence, the INR and dollar exchange rate has been important. What has to be remembered is that at the time of India’s independence, there were no outstanding credits on the balance sheet of India which meant that the Indian Rupee was at parity with the US Dollar. However, the Rupee was pegged to Pounds at that time and that meant 1 pound was equivalent to INR 13. After independence, the Indian Rupee continued to peg to the British pound at a rate of 1 Rupee = 1 Shilling and 6 pence. When India became a republic nation in 1950 and the constitution in 1952 the USD was equal to 4.16 INR.
However, it was in 1944 according to the Bretton Woods Agreement that it was decided that each country was required to peg the value of its currency to the dollar. Budget deficits, economic upheavals, economic crisis, demonetization, union budget and many other reasons have caused fluctuations in the USD-INR exchange rate.
It was on Tuesday, July 19th, 2022 when the Rupee hit its all-time low and breached a mark of INR 80 per dollar. What are the implications at a time when inflation is high and growth weak?
There are many reasons why the Rupee rate is falling but first one has to notice all of the surrounding factors that have occurred this year. Firstly, it has to be noticed that this year money is being pulled out from the Indian economy by foreign portfolio investors (FPI), mainly due to the rise in interest rates. Interest rates have been hiked owing to the central banks containing the burgeoning inflations. What this increase in interest rates means is that there is also an increase in the returns on deposits. What has been happening is that foreign investors have been pulling out the money from the less-safer investment options and parking these in banks and other financial institutions.
Secondly, there is the rupees fall in the rising dollar index. When the index rises the value of other currencies decreases. On February 21st, the index stood at 96.12. However, this index shot up to 107.08 on July 8th which is an increase of 11 per cent
Another reason for this is the sharp rise in prices of commodities due to the Russia-Ukraine War. These countries have been major suppliers of commodities such as oil, fertilisers and wheat.
With much of the supply halting, it has led to the prices shooting up and a sharp rise in India’s import bill. This high import bill is a factor in the depreciation in the value of the rupee.
Nirmala Sitharaman, the Finance Minister said at the Lok Sabha, “Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the US dollar.” This means that global currencies such as the British pound, the Japanese yen and the Euro have also weakened more than the Indian Rupee, meaning that the Indian Rupee has strengthened against these currencies in 2022.
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Interesting!