While writing this article, I have an ominous feelings.
While rupee was trading at 65 to a dollar about 8 months back, now it's trading
around 74.
Should the sanction on Iranian crude fructify to the extent
the world fears, rupee can shoot over 75 easily.
Currency is basically a function of many factors:
Dollar effect on INR
* If inflation rises in other countries, especially in US,
it bodes ill for our country. If inflation rises in US, ultimately FED has to
raise interest rate, to keep inflation under control. In case, FED hikes
interest, RBI has to raise interest on INR. Otherwise, the return on dollars
will be more attractive than rupee. It will cause instantaneous outflow of
rupee (selling) and buying of dollars, crashing our market.
Why is dollar so important or used as reserve currency?
* USD is the reserve currency globally. Renminbi (Chinese
currency) tried to usurp it from it's position, but it was not been successful.
One major reason for this is the difference in functioning of Fed and People's
bank of China. By means of constitution, Fed is independent to calibrate dollar
as per ongoing parameters of economy, while Renminbi is calibrated not
independently, but under the hawk eye of Chinese communist government. This
makes the Chinese currency inflexible and more attuned to appeasement of
People's Government Of China. The dollar is perceived as a much stronger
democratic currency, which incidentally carries the backing of the world's
strongest, powerful nation.
*It's not for nothing that dollar is the reserve currency of
our globe. If you check the events after the collapse of Lehman Brothers and
the financial rout following that in 2008, the ramifications of which continued
deep into 2009, you will notice the US economy was the first to get out of the
woods.
Even in 2018, while writing this article, Italy is still
doubt full, while Greece is yet to come clean from debts taken from European
Union and IMF. Japan is yet to emerge from deflation, and China is highly
leveraged country. That leaves Dollar as
the reliable , rock steady currency on which the world can rely, and the only
medium of global buy , sell.
Effect of dollar on Indian Rupee
The net result is that when dollar catches cold, INR suffers
too. If USA economy suffers from stagflation, FED will reduce it's interest
rate. Now if India doesn't follow suit, it's export will suffer , because the
INR will be at comparative higher rate wrt. USD and that will make India's
products costlier.
Effect of crude oil on Indian Rupee
India has to import 80% of it's crude oil requirements.
What's in that you would ask? Nothing Sir, there's only a slight hitch.All over
the world crude is priced in dollars. So whenever Brent crude rises over 60$,
India gets in serious trouble. More dollars have to be paid for buying,
resulting in larger trade deficit. This results in further weakening of the
rupee. The situation continues, rupee weakens further, till price rise stops.
However, not all is lost and there's a natural brake to how
much oil can rise. As oil rises, superusers like China and India's economy will
falter and they will consume less. So ultimately supply will trump demand and
price will turn down.
Some factors that affect our domestic currency, Rupee
Four important items which are responsible for India's CAD
are electronic items, gold, crude oil, pharmaceutical constituents. In times of
weakened rupee (like now at 74 to a dollar), government tinkers with the import
duty on these goods (especially on non core items like gold, mobile) to bring
down the import, thus stopping dollar outflow and prep up the rupee .
Rainfall, thunderstorm, snowfall, in short seasonal natural
events/calamities affect our currency greatly Lower than average rainfall means
less agricultural production. Less agricultural
production necessitates import of food/foodgrains, increasing MSP for
farmers, more subsidies in short everything% vs that increases CAD. So rupee
weakens.A good monsoon has the exact opposite effect.
How is currency useful to business apart from buy sell medium?
Currency is one of the main tool for controlling inflation.
Inflation is like diabetis, eating up the economy silently. It clogs demand and
impacts every sector of economy. The main weapon of RBI in fighting inflation
is increasing rate of interest on currency. Other tools of controlling
liquidity apart from currency is increasing SLR for banks, Repo rate etc.
In our country currency future positions are traded in
MCX-SX , NSE, BSE. It's a great hedge tool for companies taking loans in
dollars or having foreign convertible currency debts. Importers and exporters
can also use the futures positions available through exchanges to save
themselves from losses, should USD-INR rate slide down or shoot up.
For
traders, currency is a great low cost trading tool (compared to equity
futures), for RBI it's a mighty tool to tune country's economic direction, for
exporters and importers it’s a great hedging tool.
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