By Sriram Chekuri
US Dollar Indian Rupee conversion fell to a low of 84.27 a decline of more than 5 per cent in 5 weeks. Confidence in the financial system of a nation is built over a long and strong history. As such, the confidence reposed over a long period is called as reputation. Warren Buffett famously views reputation as an invaluable asset a priceless possession that takes decades to build but can be destroyed in an instant.
Because of the soundness of the financial system of USA which graduated from several elements namely market mechanism, stock and capital markets, Securities Exchange Commission, Federal Reserve at entire USA level, similar Federal Reserve boards in all states, well-regulated banks, low interest rates, free capital movement on both Current account and capital account, sound Bond market & relatively self-sufficient economy. Hence, all these factors combined made the US Dollar a reserve currency since a long time.
Before the Second World War, Great Britain’s Sterling Pound used to enjoy a similar status. Because of decolonisation and the losses suffered during the Second World War, the economy of United Kingdom suffered heavily. That is why a conference formally known as the United Nations Monetary and Financial Conference was held in Washington, D.C from July 1 to 22, 1944, where the International Bank for Reconstruction (later part of World Bank) and IMF, were created which are called Bretton Woods Twins.
Despite the collapse due to the Second World War and the loss of its colonies one by one after the war, still the systems of Great Britain remained quite sound. That is why Sterling Pound is a reserve currency regardless of its relatively less holding of its reserves across the world as compared to the US Dollar. Galloping of Dollar value against the Indian rupee is not a new miracle.
When the minority Congress Government led by PV Narasimha Rao as Prime Minister and Dr Manmohan Singh as Finance Minister was sworn in June 1991, the Indian Economy was facing a foreign exchange crisis with forex reserves sufficient for hardly 2 weeks of essential imports. To combat this precarious situation the minority Congress Government devalued the Indian Rupee from Rs.17.50 to Rs.22.74 per US Dollar about 20 per cent devaluation in 2 trenches on 1st and 3rd July 1991.
In March 1992 budget Liberalised Exchange Management system was introduced with dual exchange rate. So, in the exchange rate management system, a portion of foreign exchange was converted at official exchange rate and the remaining amount was converted at market exchange rates. Eventually, Indian Rupee became fully convertible on current account from 19th August 1994. When Dr Manmohan Singh became PM, the Indian Rupee reasonably appreciated for a brief period from early 2004 to early 2008.
However, this transitory appreciation suddenly reversed during Global Financial Crisis of 2008. In May 2013 when the US Federal reserve hinted at reducing its bond–buying program, leading to significant volatility in global financial markets, Rupee took a beating due to historic taper tantrum.
The Indian Rupee fell from Rs.53.50 to Rs.62.30 because of that step by US FRB. From that stage till the year 2014 the rupee is sliding regularly but not at jet speed. However, exchange rate in January 2024 gone down progressively to a phenomenal price of Rs 86 from a modest rate of Rs 61 in the year just before Modi took reigns of India as PM.
The race of the American dollar against the Indian rupee in the last one decade can be attributed to several intertwining factors reflecting broader economic conditions both domestically in India and globally. Firstly, the dollar has been gaining strength in the context of a fortified U.S. economy.
The renewed weakening of the Indian Rupee to a fresh all-time low of 86.68 against the US dollar comes in the backdrop of a resurgent dollar index, which has risen by 8 per cent over the past three months. The US dollar index (DXY) was trading higher by 0.08 per cent at 106.1,4 which indicated the strength of the dollar by calculating the weighted average of 6 other strong currencies of world.
The dollar index has recently reached levels not perceived in two years, boosted by stronger-than-expected GDP growth and a sharp decrease in jobless claims in the U.S. Notably, all G10 currencies, with the exception of the British Pound (GBP), had depreciated by more than 4 per cent during Calendar year 2024.
The real effective exchange rate (REER) was around 107 as per the RBI data. REER is a widely used measure of a currency's value compared to its key trading partners. A value above 100 indicates overvaluation, and for the last decade, the rupee has hanged above this benchmark. Due to President Donald Trump's actions on the tariffs the US dollar is temporarily weakening.
How the world reacts to his fancy decisions is likely to determine the future trajectory of the rupee and how RBI manages to keep volatility in the market under check is to be watched.
(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)
