Dollar will not remain strong forever

The ever-increasing foreign direct investment and strong fundamentals have the potential to propel the rupee towards strength. Therefore, we will have to wait and watch that for how long dollar can continue to remain high. — Dr. Ashwani Mahajan

The Indian rupee has been depreciating against the dollar for some time now, and rupee has depreciated from Rs 74.5 per dollar in February 2022 to almost Rs 80 per dollar, before appreciating again to Rs 68.69 per dollar on August 2, 2022. Due to this weakness of the rupee, there is a natural concern among the policy makers. On the other hand, the opposition parties are also trying to blame the government. This is not the first time that the Indian rupee has weakened against the dollar. If we calculate from 1991 till now, the rupee has been depreciating against the dollar at an average rate of 3.03 percent annually. This depreciation in rupee has not remained the same in all the years. Significantly, rupee has depreciated by 7.28 percent in the last 5 months.

In the past, the rupee had been weakening not only against the dollar, but also against many important currencies including the euro, pound, yen, yuan. For example, since 1991, the rupee has depreciated 137 percent against the pound sterling, 489 percent against the euro and 241 percent against the yen, while the depreciation against the dollar has been 252 percent. This means that in the long run, the rupee has weakened against all the important currencies.

But there has been a change in the depreciation trend of the rupee in the last 5 months till July 2022 . While the rupee has weakened by 7.28 percent against the dollar, it has gained 6.31 percent against the pound sterling, 10.77 percent against the yen and 4.72 percent against the euro. That is, it can be said that the rupee has weakened against the dollar, but it has strengthened against other currencies and those currencies have also weakened against the dollar. Since the dollar has strengthened against almost all major currencies around the world, it would be more beneficial for us to understand the reasons for the strength of the dollar against various currencies rather than the weakness of the rupee. We also have to understand that what is the future of rupee and other currencies? Today, when the dollar is getting stronger against all the major currencies of the world, the question arises whether the winning streak of dollar will continue in future also? Will all currencies, including the rupee, kneel against the dollar?

To answer this question, we need to know about the reality of the American economy. It is well known that where we talk about the indebtedness of Sri Lanka, Pakistan, European countries etc., we have to understand that the US economy is the most indebted country in the world. Today, the US has an external debt of $30.4 trillion, China’s $13 trillion and UK $9.02 trillion. External debt on India is only $ 614.9 billion, which is hardly 20 percent of our GDP. America’s foreign debt is 102 percent of its GDP, while that of England is 345 percent. It also has to be understood that some of the India’s foreign exchange reserves have been sacrificed for the past few months to maintain the stability of the rupee, but still they remain at $ 572.7 billion.

Due to the Russo-Ukraine war, today all the countries are reeling under inflation. The rate of inflation in USA has reached 9.1 percent, while in England it is 9.4 percent and in India it is only 7.0 percent. The high rate of inflation in all these countries is due to supply constraints at the international level. Due to this, the prices of fuel, food items and essential raw materials and intermediates and metals are increasing continuously. The turmoil in international markets has also affected financial markets across the world. History is witness that whenever there is turmoil in the world, the dollar gets stronger. This is because investors around the world believe that the US is the safest destination for them. This process is called ‘Run for Safe Haven’ in business parlance. It is being said by market experts that since inflation is on rise across the world, worries about growth have increased and interest rates are also rising, hence the dollar is strengthening.

Against a ‘basket’ of different currencies, the dollar has risen 10 percent in the past one year and has reached an all-time high in 20 years. The yen has hit a 24-year low against the dollar. While central banks around the world are raising interest rates in their respective countries to contain inflation, the US Federal Reserve, is also raising interest rates. Since interest rates in the US have risen more, due to this also investors from all over the world are getting attracted to the US.

Though, US companies doing business outside the US will be at a disadvantage due to the stronger dollar, with the S&P 500 losing as much as 5 percent of their revenue; companies operating in the US will benefit from a stronger dollar.

If we talk about other countries, especially smaller ones, those have borrowed heavily, they are finding it difficult to repay interest and principal. But there are some countries which are oil producing and exporting countries or which are suppliers of agricultural commodities, their currencies are not depreciating. Similarly, despite all the efforts of USA and Europe, Russia’s ruble continues to get strengthened. The reason for this is the increasing export of oil and gas by Russia and the control on capital flows imposed by the Russian government. It is true that supply chain disruptions due to China’s lockdown and Russo-Ukraine war are fueling inflation in the world. The USD is strengthening due to global turmoil and rising interest rates in the US, but it may not last long. Such situations in the world are considered to be short-lived. In such a situation, when there will be an uptick in other currencies of the world and the investors who have deserted India in search of ‘Safe Havens’ will again come back to India and other countries of the world in search of markets, then downfall of dollar would be inevitable . Talking about the recession in the world, whereas the signs of recession are being seen in Europe, America and Japan; economic activities are gaining momentum in India. Receipts from GST and direct taxes are booming. It’s notable that against all odds, GST collection reached 1.49 Lakh Crores, in July 2022. The data for the month of May 2022, show that industrial production grew by 19.6 percent, which was 7.1 percent more than the previous month. Whether it is the demand for electricity, consumer goods or capital goods, the huge growth of 20 to 55 percent in all types of demand in the country is indicating an uptick in economic activities in India. All the global institutions are expecting India to be the fastest growing economy in the world. For this reason, investors from all over the world will also be compelled to turn to India. Although there is still a big gap between imports and exports, but with increasing production in the country, this gap is going to reduce. The ever-increasing foreign direct investment and strong fundamentals have the potential to propel the rupee towards strength. Therefore, we will have to wait and watch that for how long dollar can continue to remain high.

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