In this Qikkwit we will discuss factors affecting Rupee Dollar rate calculation and reasons for Rupee depreciation against dollar. Have you ever wondered why rupee dollar rate is 60 : 1 and not 80 : 1. Do you know that major factor affecting rupee -dollar rate is same as factor affecting rate of onion in the country. Yes, demand -supply affect the Rupee -Dollar rate as well as onion rate in the country.
If demand for Dollar increases its value appreciates while on the other hand rupee depreciates. This is true vice-a-versa. There are various other factors that affect rupee- dollar rate which are as follows:
During turbulent and volatile market conditions investors prefer US treasuries, Swiss franc, gold to stocks. This leads to FDI redeeming their investments from India. This could increase the demand for dollar vis-à-vis Indian rupees.
Speculation on FX
Foreign exchanges have lot of derivative instruments through which one can hedge underlying currency rates. When speculators see markets improving or deteriorating they too want to benefit from such rising/ falling dollar. They then start buying/selling dollar which would further change the demand/ supply of the dollar.
RBI prevents too much volatility in the rupee-dollar rates to protect the domestic economy. The RBI does this by buying dollars when rupee appreciates too much and by selling dollars when the rupee depreciates significantly.
Imports and Exports
Importing foreign good like oil needs us to pay in dollars which increases its demand while exports reverse the trend. That’s why government has lot of incentives for exporters to protect the economy from rupee depreciation.
Public Debt / Fiscal policy
Whenever our Government is in fiscal debt ,to match expenses with equivalent revenue, the Government at times borrow money from institutions such as the World Bank and the IMF. This debt, accrued interests, and the payments made, also lead to currency fluctuations.
High interest rates on the government bonds attract foreign capital to India. If the rates are lucrative enough to cover the foreign market risk and if the foreign investors are comfortable with the fundamentals or credit ratings of government bonds, FDI would start pouring into India and thus provide us with a supply of dollars.