The Factors Affecting Currency Values: The Case of INR vs USD

Introduction

The value of a currency, such as the Indian Rupee (INR) or the US Dollar (USD), is influenced by a myriad of economic factors. In particular, the principle of supply and demand is the key driver in the currency market, determining exchange rates and consequently, the value of currencies.

Supply and Demand in the Currency Market

The concept of supply and demand in the open market is also applicable to the currency market. When more people choose to sell the dollar and purchase the rupee due to various needs, such as investments, imports, or other economic activities, the rupee appreciates. Historically, in 1950, a dollar was worth around 5 rupees, indicating the relative value of the currencies at that time.

Role of Economic Policies and Central Bank Actions

Central bank actions and macroeconomic policies play a significant role in the value of a currency. For instance, the Reserve Bank of India (RBI) and the United States Federal Reserve (FED) have different monetary policies. If the FED tightens monetary policy by raising interest rates while the RBI loosens its policy by cutting interest rates, the rupee is likely to underperform the dollar. Conversely, if the FED keeps its policy unchanged while the RBI tightens its policy, the rupee might appreciate compared to the dollar, provided other economic indicators remain stable.

Trade and Economic Efficiency

The volume and nature of trade between countries also influence their currency values. When a country exports more goods and services, there is an increased demand for its currency, leading to its appreciation. On the other hand, if the country imports more goods and services, there is an increased supply of its domestic currency, causing its value to depreciate.

To improve the exchange rate and currency value, significant changes in the economy are necessary. This includes improving the overall economic efficiency so that the country can compete at a higher level with other major economies. While this is achievable, it requires sustained effort, political will, and the allocation of resources to the economy.

Conclusion

Both supply and demand and central bank actions are crucial factors in determining the value of a currency. For the Indian Rupee to achieve parity or keep pace with the US Dollar, improvements in economic efficiency and trade practices are necessary. At the same time, macroeconomic policies and global economic conditions play vital roles. Achieving the desired exchange rate between the two currencies is not an easy feat, but with the right strategies and long-term commitment, it is certainly achievable.