India is actively trying to increase the usage of the Indian rupee (INR) in worldwide commerce and investment, hence the process of internationalizing the INR is gathering momentum. In an effort to facilitate the use of the home currency in foreign commercial operations, the government has just unveiled the Foreign Trade Policy.
Let us see India’s economic growth and its impact on the Indian Rupee,
INR is worth less than USD now, but it wasn’t originally. Things changed drastically after India gained its independence in 1947. 1 INR was formerly worth 1 USD. Many people claim that in 1947, one dollar was worth more in rupees. The most widely held view is that since the metric system did not exist, all currencies were equal in purchasing power. In 1944, the famous Britton Woods Agreement began. Global currency values were set by this accord. Everyone was getting used to the new situation as India attained freedom.
However, INR has steadily depreciated since 1947. According to the contemporary metric system, INR was 0.09 to 1 USD in 1913, 3.31 in 1948, 3.67 in 1949, and 7.50 in 1970. The rupee recently experienced some challenges in 2022 due to global developments, resulting in a decline of over 11%.
From its opening exchange rate of 74.40 to the dollar, the rupee has lost value this year. Throughout the year, there was an upward trend in the USD to INR pair, and on 14 July, the rupee reached a significant low of 80.20. The USD to INR price experienced a slight decrease to 78.13 before rising again to revisit an all-time low in August.
On October 20th, the rupee hit an all-time low of 82.77 to the dollar as a result of the United States’ tightening monetary policy. Since January, the rupee’s value has dropped 8.5% versus the dollar, which is consistent with the loss seen by other dollar-paired currencies.
As the value of the Rupee decreases, there is a corresponding increase in the cost of imports. This can have an impact on both external and fiscal deficits.
Can the Indian rupee really challenge the dollar in the global currency market?
The initial half of 2023 is expected to see a decline in the value of the rupee relative to the US dollar (INR to USD) as persistent worries about the economy and global inflation continue to curb risk-taking.
But given the decline in the price of crude oil and other commodities, as well as the anticipation that foreign investors would continue to purchase Indian stocks, the recovery prospects seem more promising in the second half.
According to analysts, monitoring equity inflows would be an important factor to consider for foreign investors in relation to the rupee. Wallet Investor predicted a further depreciation of the rupee against the dollar in 2025, with the USD to INR rate increasing to 88.276 by year’s end.
The Role of the Government and the Reserve Bank of India
The newly introduced Foreign Trade Policy intends to increase the home currency’s worldwide usability and make it possible for rupees to be used in cross-border trade transactions. The initiative seeks to facilitate global trade negotiations in INR at exchange rates determined by the market, thereby reducing reliance on a third currency like the USD.
The RBI has approved the INR settlement of international commerce as well as the ability to borrow money from foreign businesses in INR. The INR may also be used in cross-border trade and investment activities because of currency exchange agreements that the RBI has struck with a number of nations, including Sri Lanka, the UAE, and Japan.
Considering the current market conditions, it appears that the dollar is performing well in comparison to the rupee. As per the market analysis, there is a possibility that the rupee may face some challenges in the long run. To make the INR a highly marketable currency on the global market, India has to execute a number of reforms, such as upgrading its financial markets, ensuring a stable regulatory environment, and increasing export competitiveness.
The long-term prosperity and stability of India’s economy depend on the country’s persistent push for the internationalization of the INR. The government, RBI, and private sector must work cooperatively to enact reforms and build financial services and infrastructure to sustain the INR as an international currency.
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