Have you ever wondered how the rupee and dollar are related? How is the rupee rate determined against dollar?
Come let us discover the true story behind the American Dollar vs. Indian Rupee…
The basis of determining the price of anything remains the same – The demand and the supply forces. It’s not much different from how the prices of any day-to-day article, say for example, mangoes, are determined. Whether currency movements or prices of mangoes, the most important factor in determining their price are the same – market forces of demand and supply.
If the demand for dollar increases, the value of dollar will appreciate. As the quotation for Rupee vs. Dollar is a two way quote (that is, the price of one dollar is quoted in terms of how much rupees it takes to buy one dollar), an appreciation in the value of dollar would automatically mean a depreciation in Indian rupee and vice-versa.
For example, if rupee depreciates, a dollar which once cost Rs. 47 would cost, say, Rs. 50. In essence, the value of dollar has risen and the buying power of rupee has gone down.
Besides the primary powers of demand and supply, the rupee-dollar rates are determined by other market forces as well.
Regarding the other factors that can influence the change in the rate, there are many. If the currency value is left to market forces, then the influencing factors will be economic growth, strength of the economy, inflation rate, interest rates in the economy, fiscal deficit of the government, trade surplus/ deficit, balance of payments, exchange rate, foreign investment inflows etc. If these factors are favorable, then it is more than likely that the value of that currency will rise as people have faith in the country and will invest more money.
The market is way too volatile to judge, where the rupee is headed, but one thing that is certain is that we all hope that the rupee becomes stronger one day.
Courtesy – Charneet Sandhu