USD V/S INR:- The Dollar's Rising Value's Effects on the Indian Economy

Anushree Jha

University of Mumbai

As of 6th April 2024, The Indian Rupee has fallen down to 83.30 against the US dollar[1]. It has been felt that the Indian Rupee has been on a bumpy ride lately, facing tons of depreciation against the US Dollar which has been gaining strength. This has led to various concerns about the impact of this phenomenon on the Indian economy, with many expressing their contentions over any negative implications which may occur.

Following the recent scenario in geopolitics and economic conditions, there has been a very noteworthy change in the global financial market, with the US dollar (USD) becoming the dominating currency[2]. This increase in the value of the dollar has had an influence on economies all around the world, but it has been most noticeable in India, raising important concerns about the stability and resilience of the Indian economy.  Rising inflationary pressures, growing geopolitical tensions, and the Federal Reserve's aggressive interest rate policy have all contributed to the Dollar's recent record high versus other major currencies[3]. This phenomenon has had far-reaching effects, with developing nations like India suffering the consequences. In India, the Foreign Exchange Management Act, of 1999 establishes the legal framework for managing foreign exchange transactions[4].

The devaluation of the Indian Rupee (INR) to the US dollar is one of the most noticeable effects of the Dollar's rise. India faces numerous difficulties as a result of the weakening Rupee, including higher import prices and inflationary pressures. Sectors that rely heavily on imports, including electronics, machinery, and oil, are especially susceptible to the Rupee's decline, which might raise input costs and reduce domestic demand[5].  Moreover, India's trade deficit is typically made worse by a declining Rupee since imports become more expensive while exports become comparatively less expensive. The country's external accounts may be strained by this mismatch in trade dynamics, which could raise reliance on foreign capital inflows to bridge the gap and cause the current account deficit to expand.

In one sense, imports may be less expensive if the dollar is strong. Customers in India who are shopping for electronics or certain commodities may benefit from this. Nevertheless, the disadvantages outweigh the benefits.  India's energy needs are mostly influenced by the cost of oil imports, which increases with a declining rupee. Fuel prices may rise as a result, affecting the cost of transportation and possibly creating inflationary pressures. The correlation between rising petrol and diesel costs and recent news stories is striking[6].  Businesses in India that depend significantly on imported raw materials are also having difficulty. Increasing input costs may put pressure on their profit margins and may raise consumer prices. This may reduce economic activity in general.

Also, the Dollar's increase affects other economic sectors in addition to commerce and banking. For example, when a stronger Dollar reduces the competitiveness of Indian IT services in the global market, India's rapidly growing IT industry, which is primarily dependent on exports and operates on tight profit margins, may encounter challenges[7].  Beyond just the economic domain, the effects of the Dollar's rise also have implications for politics. Currency fluctuations add a further layer of uncertainty to the mix as India navigates an uncertain geopolitical landscape marked by tensions in the Indo-Pacific region and changing dynamics in its neighbourhood, affecting policy development and diplomatic operations[8].

The Reserve Bank of India (RBI) is balancing on a thin line. They may think about increasing interest rates to combat inflation, although doing so might impede economic expansion. It will be interesting to see how the RBI handles this tricky issue over the next few weeks.  The future course of the Dollar and Rupee will be determined by a number of variables, such as US Federal Reserve policy decisions and changes in the world economy. To guarantee sustainable economic growth and lessen the negative effects of a rising dollar, the RBI and the Indian government will need to take deliberate action.  In simple words, the Indian economy is faced with a mixed bag as a result of the growing dollar. Even while it has certain benefits, it is impossible to overlook the possibility of increased inflation and slower growth.

To guide the economy through these turbulent waters, officials will need to focus heavily on the upcoming months. Against this backdrop, Indian officials face the difficult problem of coming up with a logical plan to protect the country's economic interests while minimizing the negative consequences of the Dollar's increase. This might include enacting a strategic combination of budgetary measures, monetary policies, and structural changes to increase India's competitiveness in the global market and improve its resistance to external shocks. With the Dollar maintaining its impact on the world economy, India is at a turning point in its history, and the choices it makes now will determine its economical course for years to come. Adaptability, creativity, and vision will be the cornerstones of India's drive for economic growth in this dynamic environment, as global influences come and go.  The unfolding story of the Dollar's rise and its impact on the Indian economy, which the world is anxiously observing, highlights how interconnected countries are in a world where events in one place can have far-reaching effects across borders, influencing the fate of entire economies and nations.

References-

[1] USD/INR Currency Exchange Rate & News, Google Finance, available at https://www.google.com/finance/quote/USD-INR?sa=X

[2] Arslanalp, S., Eichengreen, B., & Simpson-Bell, C. Dollar dominance and the rise of nontraditional reserve currencies (2022), IMF, available at https://www.imf.org/en/Blogs/Articles/2022/06/01/blog-dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies

[3] Horowitz, J. (2022) How the United States is exporting inflation to other countries, CNN Business, CNN, available at https://www.cnn.com/2022/09/28/investing/fed-interest-rates-dollar-global-consequences/index.html

[4] "FEMA: FEMA Full Form, Objectives, Importance & Regulations Explained" (no date), Vance Tech, available at https://www.vance.tech/blog/understanding-fema-complete-guide-to-indias-foreign-exchange-management

[5] SinghTOI.in, N.S.-S. (2022) Explained: What a falling rupee means for India’s economy and your finances, Times of India, The Times of India, available at https://timesofindia.indiatimes.com/business/india-business/explained-what-a-falling-rupee-means-for-indias-economy-and-your-finances/articleshow/92693455.cms

[6] Kpodar, Mr. K.R. and Liu, B. (2021) The distributional implications of the impact of fuel price increases on inflation, IMF eLibrary, available at https://www.elibrary.imf.org/view/journals/001/2021/271/article-A001-en.xml

[7] "The rise of dollar index and its impact on flows to India and its stocks" (2019), Moneycontrol, available at https://www.moneycontrol.com/news/business/markets/the-rise-of-dollar-index-and-its-impact-on-flows-to-india-and-it-stocks-4419541.html

[8] "Navigating the Indo-Pacific: Development cooperation as a diplomatic tool" (no date), ORF Online, available at https://www.orfonline.org/research/navigating-the-indo-pacific-development-cooperation-as-a-diplomatic-tool