Rupee suffered its biggest session fall in past three years. The rupee plunged to all time low value 73.26 vs 1 US Dollars at the foreign exchange market. The rupee is losing is strength from very long time. In 1947, the span when rupee held the same value that is $1=₹1.

But in 2018, the scenario has gone on to $1=₹73.26

A very long journey of 71 years have made the mechanism inexplicable. However, the difference in numerical values defines the current prosperity of America’s Economy.

Business is everywhere, trade between two countries helps each other to restore and fulfill their needs. Import and Export are two basic terms which constitute a trade. Imports and Exports relies on resources of a particular country. India imports more things than it Exports. Thus, to fulfill the basic needs of such a dense population, import is necessary. CAD(Current Account Deficit) is an outcome of high importation.

Current Account Deficit: It is measurement of trade where the value of goods and services it imports exceeds the value of goods and services it exports. For India CAD is negative(as importation cost is higher) but is positive for China(as they export high quantity of goods).

CAD for India in 2017-2018 was 105.72 Crores but for 2018-2019, it has exploded to 156.80 Crores.

Demand of Dollar In World: Dollar is treated as the Global currency. It is the most stable currency, due to its stable nature dollar is the most prevalent mode of trading. Precisely Oil and Gold are exchanged in Dollar. The reason behind the above deal is treaty of America with Saudi Arab, according to which Arab pledges to exchange oil in Dollar and America ensures to protect its refinery. However, this incoherent treaty requires(demands) much more inclusive description which we will discuss later.

Any domestic currency is allocated in return of Dollar only.

The measly effective changes have helped America’s economy and Dollar to gain strength. America’s natty techniques has succeeded to attract investor’s eye-balls too.

Interest Rates In U.S.A. : The availability of Dollar in Stock markets of India, the interest rates of US and the difference in inflation between India and US alters the outcome or defines the margin of depreciation of rupee. It is not a hectic task to explore the above mentioned statements but before that we would like to introduce a basic example to explain basic investments return strategy.

Two hypothetical situations are considered (i.e. Year1 and Year2)

Year 1
USAINDIA

Inflation

$1

₹40

Interest Rate

2%

10%

 The above table indicates the conditions when $1 is equivalent to ₹40. The interest in India is 10% whereas in US, it is 2%.

Year 2
USAINDIA

Inflation

$1

₹44 (at 10% interest rate)

Interest Rate

4%

8%

 After one year, $1 is equivalent to ₹44. The interest rate has increased to 4% in US and falls down to 8% in India.

 The calculation part is indispensable to clarify the investments and returns. Just to make a calculation vivid, real and easy to understand, we have considered these practical conditions. (Year1 and Year2)

USAIndia

Invest@40

$1
00

₹40
00

Including Intere
st

$10
2

₹440
0

Return at 4
4

$10
0

₹44
00

 We have invested $100 in an United States Bank for an annual interest rate of 2% for 1 year assuming the conditions mentioned in table of Year 1, we are to invest ₹4000($1=₹40) in India for an interest rate of 10%.

NOTE: The invested money is in parity in both the countries.

After 1 Year, our investments have been magnified in both countries. The plausible amount stored are $102 in US and ₹4400 in India.

Now, if want to recover back our money in Year 2, ₹4400 is able to equate $100. Although, the rupee has increased, the dollar remains constant (the refunded money in dollar remains constant).

The summary is, if we bring the procedure or the mechanism to a halt and focus on the initial and final point, then:


Return in India

Dollar

Rupe
e

Year 1

$10
0

₹4000

Year
2

$100

₹440
0

 The familiar condition dwells up, i.e. depreciation of Rupee.

The above is a complete hypothetical situation, though is easily illustrate results.

Now, it is the time to discuss the changes in interest rates and stock market. US is steadily increasing the interest rates and they have informed that it will increase for the time being, this results in outflow of cash in India.

Outflow of Cash: American investor’s are very excited due to increasing rates. Undoubtedly, any investor is likely to stake his/her money is US and this is the reason why Indian/Foreign investors have taken away around 50000 Crore from Indian Stock Markets in last few months. This is termed as outflow of cash and it has bashed the Indian Economy to great extent.

–> Effects of Depreciating Rupee:

 The continuous loss in strength of Rupee is going to disturb the economy of India. An economy is a multiplex of production and consumption of goods and services and supply of money. Importing cost will increase.

 India does not produce Crude Oil, Crude Oil is imported in high quantity from Saudi Arab. The downfall of Rupee readjust with the increasing cost.

 Importing companies will have to deal with decreasing margin. So, to keep it constant they are likely expected to appreciate the product cost.

 Trade war between US and China created several serious issues for India. India did not receive an expansion from US tariffs(an extra tax to be paid to export/import) on Aluminium and Steel imports, prompting Modi’s Government to respond with $240 million of US goods.

The overall summary is, Indian economy needs a driving force to overcome with these situations. The depreciation in Rupee has been caused by imprudent actions of several commodities, government etc. However, Indian citizens will have to adapt and provide resistance to authority. As far as we can predict “Ache Din are not close”.