As with other commodities, market forces of demand and supply are the major determinants of the value of rupee against the dollar. In a scenario, when the demand for dollar witnesses an uptrend, the value of rupee in its respect depreciates, which consequently lowers the purchasing power of the rupee.
Current value of rupee that stands at nearly 63 against the dollar can be used to explain strength of the domestic currency against the dollar. The domestic currency value has depreciated considerably as now 63 rupees are required to buy an amount equivalent to 1$.
Prevailing global economic conditions very well reflect the reason for the recent freefall of the Indian currency against the dollar. The effect was triggered by the anticipation of the likely roll back or tapering-off of the quantitative easing (QE 3) programme by the US Federal Reserve which resulted in huge dollar outflow from several emerging economies.
In addition, there are several other market forces that determine the two-way quote for the currencies in consideration that include :
1. Global economics: Distressed global market outlook propels investors to park their hard-earned capital in safe investment baskets such as US treasuries, gold, other safe currencies, including Swiss Franc. The safety consideration results in redemption of current investments by global investors and a consequent augmented demand for dollars in comparison to rupee. The market force hence results in the fall in the value of Indian rupee.
2. Fiscal Policy or Public debt: Taxation regime and governement spending that influences the macroeconomy when under stress requires external financing. This external financing from global institutions also causes fluctuations in the value of currency.
3. Trade outlook: Higher imports and conversely lower exports also impact the quote for the underlying currencies. As more of imports, require payment to be made in dollars demand for dollar is strengthened. Because of the direct impact imbalance in trade casts on the economy, government levies multitude taxes and curbs for imports and on the other hand encourages exports.
4. Speculation: Currency derivatives now gearingly being traded in the Indian forex market also influence the value of rupee against the dollar.
5. Investment climate/ interest rate regime : In case, Indian financial markets offer lucrative investment climate with high interest rate offering on government bonds. The scenario would boost foreign capital inflow that though would increase the supply of dollars into the country and hence appreciation of the domestic currency.
6. Apex Institutions' Influence: Macroeconomic state of the economy and uncalled-for slump or surge in the value of rupee causes the apex body of India, RBI, to intervene. The institution then steps in to curb unwanted movement of the rupee in either of the directions by buying or selling dollars in case of rupee appreciation or depreciation respectively to stabilise the
Witnessing the historical lows in the value of rupee of 68.85 against the dollar in the last week of August, experts have deterrmined an intrinsic value for rupee to be 57 against the dollar.