How is the Dollar to Rupee Value Determined?

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Over the last few months dollar has risen against a basket of currencies as economic recovery in the US gathers momentum. The rupee value against the dollar is determined on a second-by-second basis as the currency is traded on the interbank forex markets, where the rupee vs dollar value is determined.

Now, when trading in the forex markets the value is determined based on many economic factors, particularly global and domestic factors. In August 2013, the rupee fell to its lowest level of 68.86 against the dollar on account of the current account deficit.

How is the Dollar to Rupee Value Determined?

1) Current account deficit a major factor

The current account deficit and trade deficit is a major factor that in the long term pushes the rupee lower against the dollar. When India's current account data soared in the middle of last year, the currency fell. Read the article Why is Current Account Deficit Bad for India 

Another factors is events abroad. For example, one of the worries that the forex markets in India had was that the roll back of the quantitative easing (QE 3) programme by the US Federal Reserve. There were fears that there would be huge dollar outflow from several emerging economies, which may push the rupee lower. That has not happened though.

Demand and supply are the major driving forces in determining the value of rupee against dollar. If demand for dollar increases the value of rupee depreciates, which therefore lowers the purchasing power of the rupee.

The Indian currency has depreciated considerably as now 61.5 rupees are required to buy an amount equivalent to 1$.

There are other factors which influence the rupee value against dollar.

2) Global Issues

Troubled global market outlook motivates investors to park their hard-earned capital in safe investment baskets such as US treasuries, gold, other safe currencies. This pushes the value of the rupee lower against the dollar.

3) Capital outflow

A sudden capital outflow due to political unrest, unstable environment or economic chaos as happened in Greece a few years ago will see a sharp depreciation in the currency.

4) Geopolitical tensions

Any international strife, sharp rise in crude prices etc., tends to push the rupee down against the dollar.

5) Imports - Exports

Importing goods from other countries requires us to make payment in dollars thus it help s in strengthening the value dollar. If a counties import are higher than exports that the value of home currency depreciate because imbalance in the trade deficit, gives rise to increasing current account deficit.

6) RBI intervention

At times the RBI tends to intervene in the forex markets. If the central bank wants to support the rupee it would sell dollars. On the other hand if it buys dollars, it may push the rupee lower against the dollar.

Factors like trade deficit and hence current account deficit, global economic outlook, internal strife, economic chaos, RBI intervention and regulatory changes are the many reasons for the rupee movement against the dollar. Check rupee rates here

Read more about: dollar, currencies
Story first published: Friday, November 14, 2014, 10:59 [IST]
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