The Indian Rupee (INR) has witnessed dramatic fluctuations against the US Dollar (USD) over the decades. From ₹4.76/USD in 1947 to ₹83.50/USD in 2023, the rupee’s journey reflects India’s economic evolution. But what drives these currency swings?
In this blog post, we’ll explore the history of INR-USD fluctuations and break down the key factors affecting currency values—all in the Indian context.
A Brief History of INR-USD Fluctuations
1947–1966 (Fixed Rate Era):
INR was pegged to the British Pound initially, later to USD (₹4.76/USD).
Devalued to ₹7.50/USD in 1966 due to wars and trade deficits.
1970s–1991 (Managed Float):
Oil shocks and inflation weakened INR further (₹12.37/USD by 1985).
1991 Crisis: INR hit ₹17.90/USD after India pledged gold reserves for loans.
Post-Liberalization (1991–Present):
Shift to a market-linked exchange rate system.
INR fluctuated between ₹40–83/USD (2000–2023) due to global and domestic factors.
Key Factors Affecting Currency Fluctuations (Detailed Indian Context)
1. Trade Deficit/Surplus
When India imports more (oil, gold, electronics) than it exports (IT services, pharmaceuticals), it creates a trade deficit, increasing USD demand and weakening INR.
Example: In FY23, India’s 267B trade deficit pressured INR to historic lows.
A surplus (like China’s) strengthens currency, but India has run deficits for decades.
2. Foreign Investment Flows
FDI (e.g., Amazon’s $6.5B India investment) brings USD, boosting INR.
FIIs (Foreign Institutional Investors) buying Indian stocks strengthen INR; sudden selloffs (like $28B outflow in 2022) crash INR.
RBI monitors these flows closely – FIIs pulled ₹1.2L cr from equities in 2022, hurting INR.
3. Interest Rates & Inflation
Higher RBI repo rates (e.g., 6.5% in 2023) attract foreign investors seeking better returns, supporting INR.
Rising inflation (7.4% in July 2023) erodes INR’s purchasing power – ₹100 buys fewer USD.
Real interest rates (RBI rate minus inflation) below 1% make INR less attractive globally.
4. Government Debt & Fiscal Policy
High fiscal deficit (6.4% of GDP in FY23) forces govt to borrow more, raising inflation risks and INR weakness.
Reforms like PLI schemes (₹1.97L cr for manufacturing) attract FDI, strengthening INR long-term.
Rating agencies (S&P, Moody’s) downgrade India if debt exceeds 90% of GDP, spooking investors.
5. Global Factors
Strong USD (DXY index >105 in 2023) makes INR weaker as USD becomes costlier.
Geopolitical risks (Russia-Ukraine war) spike oil prices – every $10/barrel rise worsens CAD by 0.5% of GDP.
Global recessions reduce FII flows to EMs like India – 2008 crisis saw INR fall 20% in months.
6. Speculation & Market Sentiment
Banks/hedge funds short INR if they expect RBI to allow depreciation (e.g., 2013 taper tantrum).
Positive sentiment (e.g., India’s 2023 G20 presidency) temporarily lifts INR despite fundamentals.
RBI warns against “excessive speculation” – fines banks for currency market manipulation.
7. RBI Interventions
Direct: Selling USD from 600B+reserves props up INR.
Indirect: NRI deposit schemes (e.g., FCNR-B in 2013) or dollar-rupee swaps to inject liquidity.
Too much intervention depletes reserves – RBI aims to keep import cover >8 months.
Summary
INR’s value dances to the tune of trade flows, interest rates, oil prices, and global cues. While RBI acts as a stabilizer, long-term strength depends on reducing deficits and boosting exports. For investors, hedging against currency risk is crucial.
Regards
Manoj Arora
Official Website
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