Last Updated on March 3, 2022 at 8:16 am
A reader wanted a simple explanation for why the INR (Indian Rupee) fluctuates in value with respect to the USD (US Dollar). A discussion.
It may seem strange but just like there is an equity market, bond market, commodities market (gold, silver, oil, cotton, etc.), money market, there is also a forex market.
That is, like all other markets, two factors determine USD-INR rates. (1) The actual demand for dollars vs supply for dollars and (2) the expected (speculated) demand vs supply for dollars.
Take for example, how the March 2020 stock market crash panned out. Prices fell for a couple of weeks due to fear but quickly recovered because of speculated future economic growth (when the current evidence was just the opposite).
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The same situation is common in the bond market too. We start learning about debt funds, we are taught that when rates fall, the NAV (particularly of long term debt funds) increases and vice versa. However, bond prices and hence the fund NAVs are determined by daily speculation on future rate movements and don’t wait for the actual event.
Similarly, there is plenty of speculation in the forex market about how future demand and supply for dollars will pan out and the Rupee will fluctuate against the Dollar. We are most concerned about INR-USD because most of our financial in and outflows are in USD.
If there is an actual or expected inflow of foreign capital (in Dollars) then it will strengthen the Rupee. That is, the Rs. per USD rate will decrease. Examples are FII investments (debt or equity) and higher exports.
Conversely, if there is an actual or expected outflow of Dollars then it will weaken the Rupee. That is, the Rs. per USD rate will increase. Examples are FII redemptions, Indians investing abroad and higher imports (eg. gold, crude oil). This will also increase inflation.
The net impact of actual and expected dollar supply vs dollar demand determines the INR-USD rate on a day to day basis.
Companies that export goods and services will benefit if the Rupee falls (eg. IT companies), but at the same time companies that require the import of foreign capital (debt) and raw material will suffer. They will do well when the Rupee strengthens. See for example 13 stocks likely to benefit the most from a stronger rupee (this is an old report, please do not use it as an investment recommendation).
In June 2021, Indian imports were valued at $41.86 billion and exports were valued at $32.46 billion. Thus India is a net importer or it has a trade deficit.
India has always been a net importer and this has resulted in the gradual depreciation of the Rupee against the Dollar. This is the historical balance of trade (exports minus imports)
The trade deficit has come down in recent years but the recovery has been affected by the pandemic.
How to get historical USD-INR rates?
- Go to gold.org
- Register for a free account and log in.
- Go to Data –> Price and Performance –> Gold Prices
- Download Gold prices since 1978 as an Excel File.
- Use the Gold price in USD and Gold price in INR (daily or weekly or monthly) to get the INR rate.
Historical USD-INR Rate
On Jan 2nd 1979 one USD cost Rs. 7.9. Today it costs about Rs. 75.
Don’t go betting against the Rupee based on this! The 10-year rolling return of the USD-INR exchange rate has been on a downward trend (an excellent sign for the growth of our economy). Also see: Sensex vs S&P 500 vs Nasdaq 100: Which is better for the long term?
Additional Resources
- Gold Price Movement: USD vs INR
- Charts: Equity vs. Gold. Vs. Debt
- Gold vs Equity (Sensex) 40-year return and risk comparison
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)