Do you wish to know why dollar is higher than rupee? It is one of the widely asked questions by most people. Thus, stay with us if you want to learn why the US dollar is more powerful than the Indian rupee.
Indian rupee and US dollar both are legal tenders that are considered as currencies. The Indian rupee is the national currency of India and is also accepted internationally. On the other hand, the US dollar is the currency of the USA, and most of the countries use the US dollar for trading. But what makes legal tender money, so to learn this, read the below-mentioned criteria.
1. It’s Widely Accepted Without Any Condition
The first criteria say the currency should be widely accepted in the nation as the Indian rupee. When we need to buy some services or products, we use our Indian rupee without any restriction. And also, the seller feels free to accept the deal and consider the transaction for exchange.
2. Can Be Stored
Another feature of money is that it can be stored, and its value remains the same as in the current market. Moreover, the money can be stored in various places, such as in a piggy bank or a physical bank for wealth creation.
3. Must Have to Be Used For Exchange
It is one of the essential criteria by which the legal tender becomes the currency or money. The people should feel free to use for the exchange as we use Indian rupee to buy things like gold and other things.
4. And Also Represent a Unit of Account
It should represent the value of tangible goods or the economic item available for sale. Hence if the money needs to be called money, it should represent the value of the goods.
And all the conditions are fulfilled by the Indian rupee and US dollar; both the currencies are worldwide recognized. However, the worldwide demand for the currency also impacts the value of the currency. And in this case, the US dollar is widely accepted, and most countries use the US dollar for international trade. But the Indian rupee has less exposure, and very few countries show interest in INR.
Reasons Why US Dollar is Higher Than Indian Rupee
Now we have gained some foundational knowledge about the INR and USD. So now, let’s find out why the US dollar is hiring the Indian rupee.
1. Capital Movement of The Country
The capital account of the BOP of the country also determines the value of its currency. And in this case, the value of the Indian rupee is affected a lot by the US dollar. Here, the capital account means the accounts containing the record of foreign transactions in and out of the country. And the BOP is the difference of international in and out of the assets and other relevant transactions.
So, if India’s inflow of the foreign currency or the capital from foreign direct investment or FII, then the supply or dollar and other assets will be higher than the market’s demand. Hence this will increase the value of the Indian rupee against the US dollar. But if the inflow is less and outflow is high, there will be less inflow of the US dollar. Hence the value of the dollar will increase the Indian rupee again, and it will become weak in front of the US dollar.
2. Account Deficit of The Currency
The current account deficit is one of the significant factors that affect the value of money against another country’s currency. It is determined by international demand and supply of money, which can depend on the BOP of the country. The Balance of Payment consists of the two terms as the current account and the capital account. The current account includes all the transactions related to foreign remittance, trade of goods and services.
And the capital accounts record the financial exchanges that come from FDI, Foreign Institutional Investments, and other overseas loans or investments. And if the export of the country is higher compared to its imports, then it will have a surplus; hence the value of their currency will increase.
Thus, the export country can ensure the flow of the US dollar to their country, and if they receive more and more USD, their currency will increase against the dollar. On the other hand, if there is an import, it will call for the demand of the US dollar, and hence the value of USD will increase against the INR.
So, if the country has more imports than exports, it will have an account deficit. And the account deficit will hurt the country’s currency, and hence its value will decrease. But if it makes a surplus, it will empower the INR, and hence it will become more robust against the dollar.
3. Additional Factors
We have the two factors that impact a lot on the value of INR against USD. But some other factors also have a negative or positive impact on the currency. The flow of foreign capital is also an essential factor that gives minimum risk but maximum returns. And if the foreign capital gets high interest, it will get a higher return on its investment. Therefore, the Fed Reserve of the US, when increasing the rate of interest, then it gets more return. And as most of the countries use USD, they pay more to contribute to the US economy hence the US dollar keeps rising.
However, the risk factor defines the investor’s interest and the flow of the capital. However, other things affect the FDI and FII. Moody, Fitch, and many other international agencies give the rankings based on their research and reports. And if the country’s market is too risky and there is a high rate of return, then many investors also prevent it. As they can look for many other secured and profitable markets. The US dollar is also considered the international reserve money that countries can use when they need the funds.
So, in this article, we tried to understand why the dollar is higher than the rupee, and here we discussed some key points. And if we summarize all these things, we can say the currency’s value in the international market depends upon the demand and supply of that currency. Currently, most of the country demands the USD instead of INR and other currencies.
Hence, the value of the US dollar keeps increasing and dominating other country’s currencies. Thus, I assume you have understood the critical reasons why the US dollar is higher than the Indian rupee.