RUPEE VS DOLLAR, How It Is Determined?

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 In India, after the Independence Fixed Exchange Rate System was followed till 1990s. In this system, the value of a currency is fixed in a predetermined ratio to another more stable and internationally used currency or to a bunch of such currencies. But in this system also the prices fluctuates but after a specific period of time. The Government or the RBI revalues according to the economic condition prevailing in the country and its international value. But in 1993, India adopted Floating Exchange System as India was drained of its Foreign Reserves and had to adopt this system in which the price of a currency is determined by the market forces which are demand and supply. The greater the demand of a currency in the International Market its value increase against its peers and vice versa.

Factors Affecting the Fluctuation:
  • Foreign Exchange Reserves: The most dominant factor in resulting the prices of the respected currencies of a Nation is the availability of Foreign Reserves. The more there is Foreign Reserves the more the value of the currency is stable and its value appreciates in the International Market. It is directly related to the Trade surplus of the country.
  • Inflation Rate: Due to inflation there is more of a supply of the currency and the prices of commodities rises. This results in the decrease of purchasing power of the country and thus its value degrades due to high inflation and vice versa in the international market.
  • Interest Rates or Repo Rate: In India, RBI provides loan to the banks at 6%p.a. and if the interest rates increases then more foreign investors would like to invest their money in Government Bonds. So this will increase the demand of Indian Rupee in the International Market which will improve its position and vice versa.
  • Current Account Deficit: It is the balance of foreign transactions of a country. If there are more imports then the country has to pay more in the other currency thereby increasing the other currency's price and its value appreciates in respect of Rupee and if there are more exports than imports then Rupees' value appreciates.
  • Stock Market: Currency value also depends on the performance of its Stock Market. If the Stock Market performs good then the currency also improves its position and if the Stock Market of the country performs bad then the value of currency decreases.
  • Import and Export of Gold: India holds the largest amount of gold in the country but it does not have the largest amount of gold reserves it means that it has to import more gold. So if the price of gold increases India has to pay more for import of gold that means the strength of Indian Rupee will go down in International Market and vice versa.

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