The value of the Indian rupee surpassing ₹86 against the US dollar is driven by global and domestic economic factors. Key reasons include the strength of the US dollar, global economic uncertainty, and imbalances in India’s import-export dynamics. These factors influence exchange rates based on the principles of demand and supply in the foreign exchange market.
How Is a Currency’s Value Determined?
1. Demand and Supply Dynamics
- Higher Demand: If a country’s currency is in high demand (due to foreign investments or trade), its value increases.
- Excess Supply: Conversely, an oversupply of the currency or reduced demand leads to depreciation.
2. International Trade
- India pays for imports (like crude oil) in US dollars.
- When imports exceed exports, the demand for dollars rises, weakening the rupee.
3. Economic Policies and Investments
- US Federal Reserve Policies: An increase in US interest rates strengthens the dollar as global investors prefer dollar-denominated assets.
- Capital Flows: A strong dollar attracts investors, causing capital outflow from emerging markets like India.
4. Political and Economic Stability
- Countries with stable political and economic systems see higher demand for their currency.
- Conversely, instability leads to reduced investor confidence and a weaker currency.
Why Is a Weak Rupee a Concern?
- Increased Import Costs: The prices of essential imports such as crude oil, gas, and medicines rise.
- Higher Inflation: Imported inflation impacts domestic goods and services.
- Costly Overseas Education and Travel: Students and travelers bear higher expenses abroad.
- Widening Trade Deficit: A falling rupee exacerbates trade imbalance, straining the economy.
Potential Solutions
- Boost Domestic Production and Exports: Strengthen export competitiveness to reduce dependency on imports.
- Attract Foreign Investment: Implement policies that draw more FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment).
- Enhance Economic Stability: Adopt robust monetary and fiscal measures to maintain investor confidence.
