Strengthening of Indian Rupee

By Deepak Maurya
Indian Rupee

Introduction

In the previous ten years, the value of the Indian Rupee relative to the US dollar has decreased by around 27.6%. The strength of a country’s currency reflects its economic health and stability. For India, strengthening the Indian Rupee (INR) is not just an economic goal but a symbol of progress and stability.

How is the Decadal Journey of the Indian Rupee?

  • About the US dollar, the rupee dropped from Rs 44.37 to Rs 60.34 (26.5%) between 2004 and 2014.
  • From 2014 to 2024, the rupee’s value decreased by 27.6%, from Rs 60.34 to Rs 83.38, concerning the US dollar.
  • Changes in a currency’s value concerning other currencies on the foreign exchange market are referred to as appreciation and depreciation.
Indian Rupee
  • The rupee fell 32.2% (from 133.77 to 90.76) according to the 40-currency basket NEER and 40.2% (from 139.77 to 83.65) according to the 6-currency basket NEER between 2004 and 2024.
  • The average exchange rate of the rupee to the US dollar fell from Rs 44.9 to Rs 82.8, a 45.7% decrease.
  • As a result, in comparison to its depreciation versus the US dollar alone, the rupee has depreciated less against the currencies of India’s main trading partners between 2004 and 2024.
  • Additionally, during the past 20 years, the trade-weighted REER for the rupee has grown for both the 40-currency and the 6-currency basket, suggesting that the rupee gained between 2004–05 and 2023–24.
  • In actual terms, the rupee has been stronger over time, with the last ten years seeing it hover around 100.

What Factors Influencing the Indian Rupee?

  • Global Economic Conditions: The strength of the Rupee is mostly determined by the state of the world economy. Global market movements, geopolitical developments, and the mechanics of international commerce may all strengthen or depress the rupee.
  • Impact of Global Trade: The trade balance of India has a big effect on the rupee. The currency is strengthened by a positive trade balance, which occurs when exports exceed imports; a negative balance has the reverse effect.
  • Influence of International Markets: The Rupee is impacted by the confidence of foreign investors in the Indian economy. A surge in foreign investment might result from a positive market mood, which would strengthen the rupee.
  • Role of the Reserve Bank of India (RBI): The value of the Rupee is directly impacted by the monetary policy of the RBI, which includes changes to interest rates and foreign currency interventions.
  • Government Policies and Reforms: Economic changes that strengthen the Rupee and draw in foreign investment include those that focus on deregulation, privatization, and facilitating corporate operations.
  • Inflation and Interest Rates: Inflation erodes purchasing power, weakening the Rupee. Conversely, higher interest rates can attract foreign capital, strengthening the currency.
  • Relationship Between Inflation and Currency Value: Low and stable inflation rates are crucial for a strong Rupee. They maintain purchasing power and investor confidence.

Also read: Impact of GST On The Banking Sector

What are Strategies for Strengthening the Indian Rupee?

  • Enhancing Economic Growth
    • Promoting Industrial Growth: Promoting manufacturing and industrial development with programs like “Made in India” may increase exports, close trade gaps, and draw in foreign capital.
    • Infrastructure Development: Infrastructure spending has the potential to increase output and draw in foreign direct investment (FDI).
    • Agricultural Reforms: The trade balance may be improved and dependency on imports can be decreased by increasing agricultural output and efficiency.
  • Monetary Policy Adjustments
    • Interest Rate Management: Interest rates can be changed by the Reserve Bank of India (RBI) to reduce inflation and draw in foreign capital. An increase in interest rates may draw in foreign investment and boost the INR.
    • Inflation Control: Controlling inflation contributes to the preservation of investor confidence and buying power.
  • Foreign Exchange Reserves
    • Building Reserves: Increasing foreign exchange reserves acts as a hedge against fluctuations in exchange rates. By interfering in the foreign exchange market, the RBI can utilize these reserves to stabilize the Indian rupee.
    • Diversifying Reserves: One way to reduce risk is to have reserves in a diverse array of currencies.
  • Trade Policies
    • Export Promotion: Boosting the quality of the products and offering subsidies and incentives to make Indian exports more competitive.
    • Reducing Import Dependence: Building up home businesses to lessen dependency on imports, particularly for necessities like electronics and fuels.
  • Boosting Tourism and Services
    • Tourism Development: Boosting travel can result in higher foreign exchange profits.
    • IT and Service Sector Growth: Using India’s advantages in services and IT to increase exports in these fields.
  • Exchange Rate Management
    • Managed Float System: Boosting travel can result in higher foreign exchange profits.
    • Reducing Speculation: Using India’s advantages in services and IT to increase exports in these fields.
  • Strengthening Bilateral and Multilateral Relations
    • Trade Agreements: Negotiating advantageous trade deals that lower import costs and increase exports.
    • International Cooperation: Working together to develop economic policies that promote growth on both sides.

What are Challenges in Strengthening the Indian Rupee?

  • High Inflation
    • Persistent Inflation: The rupee’s buying value is diminished and investment is discouraged by high and unstable inflation rates. Effective monetary policy management of inflation is important yet difficult, particularly in an economy with a variety of inflationary forces.
  • Trade Deficits
    • Import Dependency: Trade deficits result from India’s reliance on imports for essential commodities like crude oil. There must be significant structural changes as well as investments in the home industry to increase exports and decrease reliance on imports.
  • Global Economic Conditions
    • Global Slowdowns: The demand for Indian exports may decline during economic downturns or recessions in developed nations like the US, EU, or China, which would be detrimental to the rupee.
    • Commodity Price Volatility: Changes in the price of commodities globally, especially oil, have an impact on the value of the rupee and India’s trade balance.
  • Political and Policy Uncertainty
    • Policy Reversals: Abrupt or inconsistent shifts in the nation’s economic policies have the potential to scare away investors and hence undermine confidence in the rupee.
    • Political Stability: Uncertainty in the economy and a decline in investor confidence can result from political instability or major changes in governance.
  • External Debt
    • High Debt Levels: Maintaining a substantial amount of external debt necessitates considerable inflows of foreign currency for debt servicing, which may put pressure on the rupee.
    • Debt Sustainability: It’s a recurring problem to make sure that the amount of foreign debt doesn’t interfere with economic progress.
  • Banking and Financial Sector Issues
    • Non-Performing Assets (NPAs): Excessive NPA levels in the banking industry impair loan availability and erode the stability of the financial system, which in turn impacts economic expansion and currency values.
    • Financial Inclusion: It is still difficult to guarantee widespread financial inclusion and access to banking services, which has an effect on the resilience of the economy as a whole.

Conclusion

Strengthening the Indian Rupee is essential for symbolizing India’s economic health and stability. Over the past decade, the rupee has depreciated significantly against the US dollar. Strategies to reverse this trend include enhancing economic growth, managing monetary policy, increasing foreign exchange reserves, and promoting exports. Addressing challenges like high inflation, trade deficits, and global economic conditions is crucial for sustainable progress.

Frequently Asked Questions(FAQs)

  • Why is the Indian rupee strengthening?

    The RBI’s ongoing involvement in the foreign exchange markets has been a major factor in this stability. It has lately reached a record high of $642.63 billion for its foreign exchange reserves (INFXR=ECI), opening a new tab. In contrast to USD/Asia, volatility has been restrained by the RBI’s two-way FX intervention to maintain the rupee’s stability.

  • Will the rupee get stronger in 2024?

    Strong foreign capital inflows into the Indian debt market helped the rupee rise in February 2024, somewhat offsetting losses from the equities markets.

  • In which countries is the Indian rupee stronger?

    1. Nepal
    2. Sri Lanka
    3. Zimbabwe
    4. Paraguay
    5. Laos
    6. Indonesia
    7. Vietnam
    8. Cambodia

  • What is the strongest currency in the world?

    With 1 dinar equaling 3.26 dollars, the Kuwaiti dinar is the strongest currency in the world. Alternatively, 1 dollar is equivalent to 0.31 Kuwaiti dinar. Kuwait, which is sandwiched between Saudi Arabia and Iraq on the Persian Gulf, gets the majority of its income from being one of the world’s top oil exporters.

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