Have you been surfing the internet to look for information concerning the relationship between the United States dollar and the Indian Rupee? This article will provide you with a complete information on the effects of Dollar Index on Rupee.
There are a few online questions we will try to answer;
Why USD to INR is increasing today
What is the reason for dollar rate increase in India?
When was 1 dollar is equal to 1 rupee?
What type of money is rupee?
Rupee is the official currency in India, it is the official means of financial transactions and legal tender in India. The Reserve Bank of India controls issuance of the Indian Rupee, the Rupee is subdivided into 100 paise.
Effects of Dollar Index on Rupee
The value of the US dollar against six of the world’s biggest currencies is measured in the US Dollar Index. These six currencies include; British Pound, The Euro, Japanese Yen, Swiss Franc, Canadian Dollar, and Swedish Krona.
A high index means that the dollar is getting strong, while a low index means that the dollar is weak. Although the Indian Rupee is not included in the US Dollar Index, the Indian economy is hugely affected when there is a change in the dollar’s index compared to other currencies.
When there is a rise in the dollar index, the value of the Indian Rupee will fall against the US dollar. Also, when there is a fall in the dollar index, the value of the Indian Rupee increases.
Most of the gold that are consumed in India are imported gold, India only produces about 0.75 percent of world gold production, but they consume about 30% of the total global gold production yearly. This makes the dollar very important in the Indian economy.
This is because every imported goods to India is paid with the US dollar, this means that as the demand for gold keeps increasing in India, so is the demand for dollar, this decreases the exchange value of the Rupee.
Impact of the United States Dollar on the Economy of India
The economy of the United States of America is undoubtedly one of the sturdiest economies in the world. This makes the United States dollar to be one of the strongest currencies in the world. The U.S. dollar is no doubt the most volatile currency in the world today, it is regarded as a safe investment all over the world and accepted for international trade.
The dollar accounts for around 60 percentof the foreign exchange reserves in most countries’ central banks, it also accounts for 40 percent of aggregate world debt and 90 percent of forex trading.
With the above, it is fair to say that the dollar has a direct or indirect influence on every other country’s currency and economy.
When the value of the U.S. dollar increases, it affects the Indian economy in several ways;
1. Indian Stock Market
If there is a fall in the index, this means that the dollar is weak and the Rupee appreciates. At this point, foreign investors in India have the chance to make higher returns of investments. When this happens, there will be an inflow of either Foreign Portfolio Investment, and or Foreign Institutional Investment. The inflow of either or both the two investments will usher in a buying pressure in the stock market and this will make the Indian stock market to boom and becomes bullish.
2. Foreign Portfolio Investment and Foreign Institutional Investment contribute to economic growth
As explained above, the fall of the dollar makes foreign investors to sort for lucrative investment avenues in India so as to make higher returns of investments. This causes an inflow of Foreign Portfolio Investment, and or Foreign Institutional Investment, this automatically contributes to the economic growth of India.
3. Changes in metal prices
It is a known fact that the price of gold moves in an opposite direction with the price of the United States dollar. If the price of the U.S. dollar reduces, the price of gold will increase. With India being the present largest consumer of gold, a rise in the price of gold will affect the country’s economy.
4. Changes in fuel prices
The largest exporter of crude oil is India, crude oil is traded in the United States dollar. This means that any change in the value of the U.S. dollar will automatically affect the prices of crude oil and this means the Indian economy will be affected too. Another example of this scenario is Nigeria, where the value of dollar to naira today depends on the price of crude oil per barrel.
If there is a rise in the dollar index, the prices of crude oil becomes more costly, the increase in the cost of Importation will create a deficit in the current account of India. Such situations affects the profitability of oil players like; companies, refineries, and importers. The case is entirely opposite when there is a fall in the dollar index.
What is the reason for dollar rate increase in India?
There are many reason the value of dollar is increasing in India. Like we said before, India is the largest consumer of international gold productions but yet it produces only 0.75 percent of international gold production.
This means that more than 98% of the gold consumed in India are imported. This also translates an increase in the demand for dollars since Gold importation and valuation is mostly done in United States dollar.As a result of this, the dollar rate keeps increasing in India.
Why USD to INR is increasing today
This is because of the factors listed above, India continues to lead as the highest consumer of gold without exporting an equivalent quantity, thisconstantly increases the demand for dollar and reduces the value of the Indian Rupee.
When was 1 dollar is equal to 1 rupee?
This was as far back as 15th August 1946. One Indian rupee was equal to one United States dollar.
