The Indian Rupee (INR) is valued lower than the United States Dollar (USD). This fluctuating value, known as the exchange rate, is determined daily in the global foreign exchange market and serves as a crucial indicator of a country’s economic strength. A stronger foreign currency makes imports more expensive and exports cheaper.
Factors Influencing the USD-INR Exchange Rate
Several factors contribute to the higher value of the USD compared to the INR. India’s reliance on imports from the US, rather than exporting at a comparable level, strengthens the USD due to increased demand. This demand is further fueled by the need for INR to be converted into USD for these transactions, leading to a positive balance in the US capital account.
The Role of Foreign Capital in India
Developing economies like India often rely on foreign capital and borrowing for economic growth. Foreign capital encompasses investments made by foreign entities in a country’s assets, shares, and deposits. These investments fall into two primary categories: Foreign Direct Investment (FDI), involving long-term physical investments like establishing plants or purchasing buildings, and Foreign Institutional Investment (FII). Commercial loans from domestic banks to foreign businesses or governments also constitute foreign investment. Attracting foreign capital is essential for India’s development, not solely through borrowing but also through strategic investments.
Supply and Demand Dynamics of the US Dollar
The value of the USD is significantly influenced by supply and demand. US exports generate demand for USD as international buyers must use the currency for transactions. This demand creates a supply of USD. Conversely, when developing nations purchase goods or services from the US, they convert their local currency into USD, further increasing demand. Similarly, when US corporations issue bonds purchased by foreign investors, the payments are made in USD, contributing to the currency’s strength.
Understanding Net Capital Outflow
Net capital outflow refers to the investment of funds in foreign countries. It occurs when a country invests more abroad than within its own borders. Essentially, it represents capital leaving the country to acquire foreign assets. Calculated as savings minus investment, net capital outflow can involve foreign direct investment (active management of acquired assets) or portfolio investment (passive investment without management). A positive net capital outflow indicates residents purchasing more foreign assets than foreigners acquiring domestic assets. Conversely, a negative index signifies foreigners investing more in domestic holdings than locals. This dynamic impacts the USD-INR exchange rate as increased demand for USD arises from purchasing US goods and services.
Reasons for the Dollar’s Higher Value
The USD’s status as the world’s most demanded currency stems from significant US exports. Factors contributing to the INR’s lower value include India’s fiscal deficit, reliance on crude oil imports, rising gold prices, increasing imports from China, tourism expenditures by Indians in the US, and the demand for imported goods like cars and electronics. The value of any currency is fundamentally linked to its market demand. The US, as the world’s largest economy, contributing approximately 25% of the global economic output, conducts a substantial portion of global trade, including crucial energy resources like crude oil, in USD. Moreover, the US boasts the highest number of multinational corporations and extensive international trade relationships.
Conclusion
The USD’s higher value against the INR is driven by India’s greater reliance on imports compared to exports. As of the time of writing, the approximate exchange rate is 1 USD to 73.28 INR, although this fluctuates constantly. Smaller, less industrialized nations with currency pegs to the USD, like the Bahamas, demonstrate a different dynamic due to lower reliance on imports like crude oil, unlike India’s significant dependence. It’s crucial to remember that a currency’s value isn’t the sole indicator of economic health; other factors like low inflation, strong GDP growth, and healthy employment rates also play significant roles.
