The moment someone in India talks of currency our thoughts go straight to USDINR rate. But it ends right there. Why? Because the moment we see the comparison of Indian Rupee and the US Dollar, we develop a feeling of shame. That’s right, it’s hard to accept but the reality is Indian Rupee is only 1.4% of $1 (USD) as on today.

The point is how come Indian rupee which was once just ₹4 or ₹5 per $ has now shot up to 70+ levels. It wasn’t just a one-year story or a decade story. It’s an issue that began long ago. In the year 1991, India was going through one of its biggest financial crises, economists explain it as a Balance of Payment crisis. The Indian economy was almost on the verge of total collapse. Then, at the most vulnerable point, Dr Manmohan Singh and PM PV Narsimha Rao helped India come out of the crisis. We all know the famous ‘Airlift of Gold’ story. India fell short of money due to the drastic fall in exports to Russia. This increased India’s deficit to the peaks.

India had to take IMF’s help and as a collateral for the loan of $3.9 billion, India pledged our gold reserves. It was not the papers or agreements, but it was airlifting of physical gold to London and Switzerland that helped India. We were able to overcome the bad phase and that kick-started the best ever economics reforms in our country. We all know it as ‘LPG’. So, liberalisation, privatisation and globalisation mean India had to open up. Open the borders for foreign investments, get transparent and make it easy for foreigners. But, like every vaccine has side effects, India’s LPG also brought in uninvited issues.

 

We will only speak of one change that did the damage to Indian currency. From being a fixed economy and managed currency rate, India had to switch to a flexible or floating currency rate. The step taken was to instil the confidence in the investors and also increase the competition in the market. This led to a deep devaluation of our currency. INR Jumped from ₹24 in 1991 to ₹33 in 1993. The number of exports against imports was very little. The gap in imports and exports called for much-needed correction.

The currency kept devaluating and the INR rate recorded ₹48.5 in the year 2002. 2003 brought new govt in action and the currency got stable. But never it broke 40 mark. Once again, the 2008 financial crisis proved to be a blessing in disguise. Though economically it really didn’t help much. The USDINR rate fell to ₹39.5. Since then in the last 12 years, Indian currency got devaluated to the levels of ₹75 in 2020.

2014-2019 – the first term for NDA govt proved to be the best 5 years for BJP led Govt as Indian currency didn’t move up much. It was always in the range of 65-70. But things have now again heated up due to the slowdown in the economy and reduced exports. Added to all this, COVID19 is playing its part in weakening the Indian currency.

Fluctuations are the part of Currency once it’s in the Market!

The day India moved from a fixed exchange rate to floating exchange rate, things got worse. It was like throwing a skinny dog to fight with the beast. Here the beast is market, and our currency’s strength against the top currencies in the world is arguably worst. India has a long way to go for the rupee to gain back its strength. The possible ways for it?

India Balance of Trade

One well-known and another lesser-known. You say Make in India, Aatmanirbhar Bharat or anything else, India has to export more, more and more. This has to happen for as many as 10 years. A strong and upward trend of increasing exports and reduced imports will help in Rupee’s appreciation. Even if India continues to move in the present condition, we will soon hit the century mark against the USD. The point is, with the value creation happening in the US, it’s always a tough task to fight for an appreciation of Rupee. It’s a great achievement if India can stabilise if not depreciate our value against the dollar.

The lesser-known method or the way to appreciate our current rate is to trade, trade and trade. No not the physical trading. But, trading in the currency derivatives. India has to develop its base in the trading of currency derivatives. The value of currency derivatives transactions in India is in no comparison to the USA. Hopefully, India will improve in the currency derivatives in the coming years.

Here goes the fact:

US Currency Derivatives Market Turnover – $7.1 trillion per day (2020)

Indian Currency Derivatives Market Turnover – ₹45,495 Crores (2020)