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Thursday, November 24, 2011

THE DOLLAR RUPEE STORY !!!

On 22nd November 2011 Rupee touched its year high of Rs. 52.73/1$, making RBI governor to give public statements. If US dollar weakens importers are benefited and exporters are at loss. Whenever Dollar weakens against Indian Re exporters blasts their feelings & so RBI have to step forward for their help. But have you ever imagine that once our 1 INR was equal to 1$ but eventually $ become strong against INR, how read on to know this -

When India got independence in the year 1947, there were no loans or external Debts on Indian government. The exchange rate as on 15 August 1947 was 1US$ equal to 1.00 INR. With the introduction of 5 year plans Indian government needed foreign borrowing and started devaluing INR. Which was further influenced by Indo- China war in 1962 and Indo- Pak war in 1965 which devalued INR more as India needed large funds for buying weapons.

In the year 1966, 6 June at the time of  Mrs. Indira Gandhi as the prime minister, inflation was increasing at a tremendous rate and also to keep on the aids given by US to India, USA government demanded and pressurised Mrs. Gandhi to devalue INR against US$. And kept the rate of 1US$= 7.50 INR. The then ministers Mr.Krismachari & Mr.Kamraj opposed these policy but it was of no use as Mrs. Gandhi was interested in getting help from US and kept INR weak against US$.

US$ grew stronger after 1971
After the year 1970, US$ grew stronger against INR due to incompetence of Indian politicians and bully of US. The exchange rate in 1970 was 1US$= 7.47 INR, which rise to 1US$= 8.40 INR in 1975, after the assassination of Mrs. Gandhi in the year 1984, and due to Boffors scandal tumbling Rajiv Gandhi’s government made the INR weaker and the rate was 1US$= 12.36 INR in the year 1985. In the year 1990 1US$ was equal to 17.50 INR.

Drastic drop in 1991
Whenever India faced economic or political problem, US made India to devalue INR against US$ by offering funds or trade benefits. In the year 1991 under the Narshima Roa government, India faced a drastic drop in INR against US$. At that time the Indian Forex reserve dropped to its bottom and there was a time where the balance of Forex reserve was such that India would be able to pay just 3months of Import bills. To fill in this gap India borrowed huge amounts from International Monetary Fund’s (IMF) with the condition that INR will be devalued against US$ and due to this 1US$ became 24.58 INR from Rs.16.31/1$. During this period exporters flourished as their exported products gained them more value in Rupee term.

History of Rates slowdowns -
In the year 1992 1US$ was equal to 28.97 INR; in 1995 1US$ was equal to 34.96 INR; in 2000 1US$ was equal to 46.78 INR; In the year 2002 June 1US$ was equal to 48.98 INR; After June 2002 INR became stronger against US$. In the year 2002 of December 1US$ was equal to 48.14 INR; in 2003 1US$ was equal to 45.57 INR; in 2004 1US$ was equal to 43.84 INR.
During the year 2004-06 RBI started buying $ and Indian Forex reserve raised to $200 cr, RBI stopped buying $ from January 2007 when 1US$ was equal to 44.25 INR; On 16th May 2007 1US$ was equal to 40.79; on 27th October 07 1US$ was equal to 39.21 INR it’s all time high when FII’s were flowing in tones of money in Indian capital markets; on 3rd march 2009 1US$ was equal to 52.16 INR which was all time low of Indian Rupee. Which is now broken.

What can be the real value of US$?
Today $ is high against Re. But to determine the real value of any currency we have to see its Purchasing Power. This is known as Purchasing Power Parity (PPP).
The purchase rate of any product in US is compared with the rate to be given in Indian currency to buy that same good. For example to buy 1 dozen of fruit will costs 1$ in US, that same fruit would cost Rs.15 in India per dozen(of course inflation & other factors are not considered). This was just an example but to know real effective rate of any currency REER or Real Effective Exchange Rate index is referred to.

What Real Effective Exchange Rate (REER) index?
REER index measures a domestic currency’s competitiveness against other major currencies and is an indicator of currencies relative value versus foreign currencies. REER index is the 6 currency basket which uses 3 year moving averages for calculating weights of the index taking 2004 -05 as base year. The 6 currency REER index in India is calculated using Euro, US Dollar, Yen, Pound Sterling, Hong Kong Dollar & Renminbi. REER relates to purchasing power parity hypothesis. It's the invoicing currency that has more weightage and since 80 % of our trade is done in US$ it is assigned more weightage in REER INDEX.

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches 105 & props Rupee up if REER gets close to 95. REER above 100 indicates relative strength of the currency. REER levels as on 25 Aug 2011 was at 117.01 implies that rupee is weaker compared with the base year of 2004-05.

There is also a 36-currency REER index, which is also used to measure competiveness of currency. However, this index is not used too frequently since CPI data for many nations comes with a 3-month lag. On an average basis, the 6-currency real effective exchange rate (REER) appreciated by 12.7 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36-currency REER by 7.7 per cent.

REER Trends:
The 6-currency REER index rose to 112.76 in the period leading up to the economic crisis in 2007-08. During the crisis, REER weakened as rupee depreciated due to fall in capital flows. In one of the sharpest fall during the period, it fell to 93 levels in March 2008. REER stood near 100 for almost two years in 2008 and 2009. As the economy gathered pace, REER started appreciating and scaled to 116 by April 2010. From April 2010, REER has stayed around 115 for 17 months. REER strength and weakness before and after the crisis have been due to demand and supply factors led by capital flows. However, recent slide in rupee has been triggered by euro-zone problems.


READ HERE FOR MORE ON US DOLLARS - CLICK HERE

31 comments :

  1. hi bhavikk,

    A very good article on Rupee Vs Dollar. It helped a lot to understnad how our rupee is devalued.

    thanks

    ReplyDelete
  2. you have a very informative blog and so simply explained.

    ReplyDelete
  3. HI, Kajal
    Thanks for your kind words..and adding your self to the blog...
    If you like you can also drop in your request to get the blog post directly into your mail box, just mail your request to montyuu@yahoo.com.

    Do visit again...
    Thanks
    BHAVIKK SHAH

    ReplyDelete
  4. This is the second post I am reading from ur blog, u have got nice posts :) And Dollar Vs Rupee (Good for people working in US :))

    ReplyDelete
  5. hey Bhavik u have explained very well and it was easy to understand the fall of Indian economy, thanks to you

    ReplyDelete
  6. the value of 1 rupee was less in 1890's cause in a book frm VIVEKANANDA he said that 1 dollar was 3 rupees plz reply asap

    -Abhijit Suvarna

    ReplyDelete
  7. HI , Abhijit Suvarna
    Thanks for the info..I will definitely go through it..If you have any to cit it down..
    Thanks
    Do visit again
    Regards
    Bhavik Shah

    ReplyDelete
  8. sir this is by far the best explanation i have got for the rupee vs dollar saga

    thanks

    ReplyDelete
  9. It was simply explained and I gained a lot of knowledge thrugh it.

    ReplyDelete
  10. wats the source of figures ?

    ReplyDelete
  11. wats d source of figures ?

    ReplyDelete
  12. HI Anonymous,
    Thanks for visiting
    Its from RBI ARCHIVES...
    Do visit again
    Regards
    Bhavik shah
    BHAVIK SHAH

    ReplyDelete
  13. Hi Bhavikk,

    It was really fascinating and interesting to know how our currency depreciated.

    Explained in a way even a layman can understand.

    ReplyDelete
  14. Hi Bhavikk
    Less is more, a fine one on Rupee vs Dollar.
    So simple for anybody.

    thanks
    Sushil Pohan

    ReplyDelete
  15. HI,

    Your article is so informative and simply explained, but you haven't mentioned the difference during 1947 to 1966 I remember I have read somewhere that dollar was weaker than INR till 1962. If you can put some insight it would be a great help.

    Dollar Vs INR comparison is excellent but need to understand REER Index more if you cna suggest some book or any article just for my understanding. At the end your blog is informative and explained in a common man language.
    Thanks Vishal Singh

    ReplyDelete
  16. Why double standards??
    Even this is your post, right??

    http://stockmusings.com/tracing-the-genesis-of-the-rupee-dollar-relationship/

    ReplyDelete
  17. Hey Anonymous
    Firstly, I thank you for taking out your time and commenting on the post..
    Secondly, I dont know what you see as double standard ? - both the posts are mine and I have tried to explain about the currency as far as I can..
    If you still feel you are most welcome to point it out to me...

    Regards
    Bhavikk shah

    ReplyDelete
  18. Hello Bhavikk Shah
    Excellent effort to give the light in currencies dramatic & drastic action. Thanks

    ReplyDelete
  19. Hi mr.bhavik shah thanks alot fr gr8 information abt rs.vs dollar..really helpful for everyone easy to understand thanks agin..

    ReplyDelete
  20. Hello Bhavik,
    Excellent stuff about dollar. Very informative blog. Really loved it... Really love the way u write...

    ReplyDelete
  21. Explained in layman's language.. I understand now why smart people keep reiterating to buy only Indian products and to avoid foreign made brads..

    ReplyDelete
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  23. HI Bhavikk is there any hope in future that 1 rupee = 1 dollar ?

    ReplyDelete
  24. HI Bhavikk is there any hope in future that 1 rupee = 1 dollar ?

    ReplyDelete
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