India’s ambition to become the backbone of the global economy is fading

Last Updated on January 22, 2025 7:00 am

At the moment, one dollar is equal to 86.54 Indian rupees. A couple of days ago, the figure had reached 87 rupees. The rupee is gradually weakening against the dollar. The price is falling sharply. The question is, why? What are the reasons behind this decline?

In 2014, the price of one dollar was 61 rupees. In the last fifteen years, it has reached 86.54 rupees. With this decline, the dream of becoming the world’s largest economy is also gradually fading. The Indian currency has been going up and down since independence. The main reason behind this is political and economic instability.

At the time of independence in 1947, the value of the Indian rupee was equal to the US dollar. There was no foreign debt. In 1951, the Five Year Plan was launched. From then on, the turn of taking foreign loans began. The rupee had to be devalued. After that, the value of the rupee was stable for 18 years. From 1948 to 1966, the value of the rupee against the dollar was around 4.79. India was involved in wars with China in 1962 and Pakistan in 1965. In those wars, the budget suffered a major setback. As a result, the central government reduced the value of the rupee to 7.57 against the dollar.

In 1971, the rupee broke ties with the British currency and was linked to the US dollar. In 1975, the price of the Indian currency was fixed at 8.39 rupees against one US dollar. Then in 1985, the rupee depreciated again. The price stood at 12 rupees per dollar. In 1991, India fell into a major financial crisis. Foreign exchange reserves hit rock bottom. India had only enough currency to import for 3 weeks. Inflation was rising by leaps and bounds. In this situation, the rupee depreciated again. The price stood at 17.90 rupees per dollar.

1993 was the most important year for the Indian economy. The value of the currency was left to the market. The market also started determining the exchange rate. Instability arose. Finally, the central bank intervened. The rupee was worth 31.37 against the dollar.

From 2000 to 2010, the rupee fluctuated between 40 and 50 per dollar. But since then, the price has gradually started falling further. It has now reached 86.54 rupees. It had also reached 87 rupees a couple of days ago.

Reasons for the fall

Foreign institutional investors are withdrawing investments from the Indian market. As a result, pressure is being put on the rupee. The US dollar has strengthened in the international market. As a result, the rupee is weakening against other currencies. India’s exports are relatively low. If exports do not increase, foreign currency will not come in. The rupee will weaken further.

From 2000 to 2010, the rupee fluctuated between 40 and 50 per dollar. But since then, the price has gradually started falling further. It has now reached 86.54 rupees. It had also reached 87 rupees a couple of days ago.

Foreign institutional investors are withdrawing investments from the Indian market. This is putting pressure on the rupee. The US dollar has strengthened in the international market. As a result, the rupee is weakening against other currencies. India’s exports are relatively low. If exports do not increase, foreign currency will not come in. The rupee will weaken further.

How does currency depreciation happen

In the international market, the price of a currency is determined based on demand and supply. It is the same as the price of every product. The only difference is that in the international currency market, currencies are exchanged with each other instead of products.

When demand decreases compared to supply, the value of the currency decreases. Then the value of the foreign currency automatically increases. The central bank formulates monetary policy. Supply is made accordingly. At the same time, foreign demand is also a big factor. To buy goods or assets of a country, you have to buy them in the local currency. As a result, if the demand for those goods is high, the value of the currency increases. If it is low, the opposite is true.

Experts blame India’s higher inflation compared to the US as the reason for the fall of the rupee against the dollar. It is believed that the monetary policy of the Reserve Bank is a little looser than that of the US Federal Reserve.

India buys oil and raw materials from abroad at higher prices. This is also one of the reasons for the weakening of the rupee. Because India could not increase exports. If that was possible, the demand for the rupee would have increased. This is also affecting the foreign exchange reserves. It decreased from $ 700 billion in September to $ 640 billion in the last week of December, which is an 8-month low. However, analysts also say that if the Reserve Bank had not intervened to balance the value of the rupee against the dollar, the situation could have been worse.