In Global Economies and Exchange markets, the value of the currency is essential to determine a country’s economic output.
The value of a currency, such as the Indian Rupee, is a dynamic entity shaped by various factors like economic policies, geopolitics, and global markets.
As Investors and policymakers, you must monitor the value of the rupee in the context of the global market. This practice is crucial for maintaining the health of investments and staying well-informed about market dynamics.
The value of a currency impacts various facets of an economy, from international trade to inflation rates. Governments and central banks carefully monitor and often manipulate their currencies to maintain stability and competitiveness in the global market.
Countries actively engage in manipulating their currency values to gain a competitive edge in international trade or to stimulate domestic economic activity.
Reserve Bank of India (RBI) takes on the responsibility of shaping the currency’s value. The RBI employs a mix of monetary tools, including interest rate adjustments and forex market interventions, to maintain a balance in the Rupee’s valuation.
In this article, we will discuss how rupee value determined, the factors that affect currency value, and much more.
Indian Rupee Value against Top 10 Highest Currency in the World
The following are the Indian Ruppe values against the Top 10 Highest Currency in the World–
| 1 | Kuwaiti Dinar | 1 KWD | 269.26 INR |
| 2 | Bahraini Dinar | 1 BHD | 219.78 INR |
| 3 | Omani Rial | 1 OMR | 219.47 INR |
| 4 | Jordanian Dinar | 1 JOD | 116.64 INR |
| 5 | British Pound | 1 GBP | 105.33 INR |
| 6 | Gibraltar Pound | 1 GIP | 105.19 INR |
| 7 | Cayman Island Dollar | 1 KYD | 99.31 INR |
| 8 | Swiss Franc | 1 CHF | 92.32 INR |
| 9 | Euro | 1 EUR | 89.94 INR |
| 10 | United States Dollar | 1 USD | 82.75 INR |
Factor Affecting Currency Value
The following are the factors that affect the currency value of a country-
GDP Growth
The Gross Domestic Product (GDP) growth rate is an economic indicator, representing the total value of goods and services produced within a country’s borders in a given financial year.
This measurement, typically expressed in US dollars, necessitates evaluating the local currency against the US dollar to determine the current exchange rate. This significantly influences both the GDP growth rate and the overall valuation of a country’s GDP figures.
Trade Balances
When countries engage in trade, monetary transactions occur between them. In these trade relationships, some countries export more goods and services, while others import more.
This disparity in trade values results in what is known as the trade balance, which can be either positive or negative.
This trade balance influences the local currency value and also impacts the exports and imports. Trade surpluses or positive trade balances often strengthen a currency, while deficits may lead to depreciation
Interest Rates
Banks work on loans and debt assets to make money and this money is managed by RBI which acts as a custodian for all the banks in India. Based on the monetary policy of the RBI, RBI changes the interest rate which is also known as Repo Rate to influence the cashflow in the market.
The RBI implements these measures to manage inflation effectively ensuring the overall stability of the country’s economy. This policy pursued by the RBI directly influences the value of the currency, potentially impacting the purchasing power of the currency in terms of acquiring goods or services.
Reserve Levels
Every country maintains a Foreign Exchange reserve to act as a buffer against any economic shocks. These reserves are maintained in high-value currencies and metals like US dollars, Euro, Gold, etc.
A higher reserve indicates a country’s capacity to safeguard its economy against external factors. This factor becomes a compelling incentive for investors to consider secure investments in the country, thereby potentially increasing Foreign Direct Investment.
The inflow of FDI has a positive impact on a country’s currency value as well because of the accumulation of high-value currency with the Government which can be used to influence the internal foreign exchange market.
Inflation Rates
Inflation can be defined as the sustained increase in the general price level of goods and services in an economy over some time, leading to a decrease in the purchasing power of a currency.
It is often expressed as an annual percentage, representing the rate at which prices rise, causing money to lose value and affecting the overall cost of living.
Inflation can be influenced by various factors, including demand and supply dynamics, changes in production costs, and monetary policy decisions.
Central banks typically aim to manage inflation to achieve price stability and support overall economic stability.
How Rupee Value Change Affects the Indian Economy?
The value of the Indian Rupee is not just a number but is a critical factor influencing the country’s economy. Changes in the Rupee’s value, whether appreciation or depreciation, have multifaceted effects on various areas of the Indian economy.
Import and Export
The value of the Rupee is utilized by traders to exchange it against US dollars for international trade. An appreciating Rupee can reduce the cost of imports, making imported goods more affordable. This benefits consumers and can contribute to lower inflation. Exporters may face challenges as their goods become relatively more expensive for foreign buyers, potentially impacting India’s trade balance.
Inversely, Exporters benefit as their products become more competitively priced in international markets, potentially boosting export earnings.
Inflation
Inflation, the persistent increase in the general price level of goods and services, plays a significant role in shaping the value of the Indian Rupee.
When inflation is high, the purchasing power of the Rupee diminishes, causing a decline in its real value.
This erosion in value can influence both domestic and international perceptions of the currency, affecting trade dynamics.
Foreign Investments
The influx or outflow of foreign investments has a profound impact on the valuation of the Indian Rupee.
A surge in foreign investments can lead to an appreciation of the Rupee, reflecting increased confidence in the Indian economy.
Conversely, a withdrawal of foreign funds may exert downward pressure on the Rupee, signaling concerns among investors and impacting its value.
Balance of Payments
The Balance of Payments, which accounts for a country’s economic transactions with the rest of the world, is a crucial determinant of the Rupee’s value.
A surplus in the current account, reflecting higher exports than imports, tends to strengthen the Rupee.
Conversely, a deficit may contribute to Rupee depreciation. This dynamic interaction underscores the integral link between a country’s trade balance and the value of its currency.
FAQ
The value of the Rupee influences the prices of imported goods, potentially affecting inflation and the cost of living. When the Rupee depreciates, inflation goes up and prices of the commodities also go up making Goods and Services costlier.
The RBI employs various monetary tools and interventions to stabilize and manage the Rupee’s value in the foreign exchange market.
Export-oriented industries will be affected by Rupee appreciation or depreciation, impacting their competitiveness and profitability. If the rupee depreciates, the conversion of other currency into Indian Rupee will be much more profitable for the Indian Business and vice versa.
The RBI considers factors such as inflation, economic growth, and global economic conditions when making decisions that impact the Rupee’s value.
