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Rising Kashmir > Blog > Opinion > Impact of US Dollar on Indian Economy
Opinion

Impact of US Dollar on Indian Economy

MOHAMMAD HANIEF
Last updated: March 21, 2023 12:06 am
MOHAMMAD HANIEF
Published: March 21, 2023
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The US Dollar Index measures the dollar’s value against six of the world’s biggest currencies: British Pound, Japanese Yen, Swedish Krona, Canadian Dollar, US Dollar, and the Swiss Franc. If the index is high, the dollar is performing well, while a low index indicates a weak Dollar. Though the Indian Rupee does not feature on the index, when the dollar’s index changes compared to other currencies, it impacts the Indian economy.

 

Any rise or fall in the price of the dollar has far-reaching impacts on the economies of other countries, including India. If we talk about the Indian economy, the Dollar price movements deeply impact different segments of the economy, collectively impacting the economy as a whole. As such, foreign investors get the opportunity to reap higher returns on their investments in India. This leads to an inflow of Foreign Institutional Investment (FII) and/or Foreign Portfolio Investment (FPI). Due to the inflow of FIIs and/or FPIs, there is a buying pressure in the stock market, and the Indian stock market booms and becomes bullish.

 

With a falling Dollar index, foreign investors find India a lucrative investment avenue to earn higher returns on their investments. As such, FPIs/FIIs flow into the Indian economy and contribute to economic growth. The flow of capital to companies from their international joint venture partners goes up as FPIs and FIIs increase. This allows companies to grow and expand themselves. Exports also increase, leading to a favorable Balance of Payments position for the country.

 

It has been historically observed that gold prices move inversely with the price of the dollar. So, if the Dollar index increases and the dollar appreciates, the price of gold would fall and vice-versa. This price movement of gold impacts the demand and supply of gold and, as such, impacts the Indian economy.

 

Fuel and oil commodities are traded in Dollars. India is the largest importer of crude oil, and any change in the Dollar index affects crude oil prices and thus the Indian economy. If the Dollar index rises, crude oil and other commodities become costlier. This increases the import cost and creates a deficit in India’s current account. Moreover, it also affects the profitability of oil companies, oil importers, and oil refineries. The opposite holds if the Dollar index falls. The trade deficit reduces, and oil companies become more profitable.

 

The Dollar index also impacts the inflationary trend in India. An increase in the Dollar index makes the dollar strong and depreciates the value of the INR. A weakened rupee makes imports costlier and impacts India Inc.’s profitability due to increased production costs. Increased costs lead to inflation, and the prices of goods and services rise, much to the detriment of consumers. Thus, the overall GDP (Gross Domestic Product) is impacted and suffers a slowdown when the dollar strengthens.

 

On the other hand, for companies engaged in exports, an increasing Dollar index is favorable because they can earn a higher revenue in terms of the US Dollar. Companies in the IT sector and pharmaceutical companies that primarily export their goods and services become more profitable when the Dollar index increases and vice-versa.

 

Many companies have borrowed Dollar-denominated debt for their cost-effectiveness. Such companies are directly impacted if the dollar rises. A strong Dollar proves costly to companies having Dollar-denominated debt as they have to shell out more in INR to repay their debt. This, therefore, impacts the profitability of such companies negatively and might lead to a financial crunch or even insolvency.

 

The US Dollar, therefore, impacts all the aspects of the Indian economy considerably. You must understand this impact since it impacts you, too, the consumer. The dollar’s impact on the stock market will affect your investments. Moreover, as the dollar impacts inflationary trends too, it would impact your monthly budget as well as consumption habits.

 

The Indian Rupee has remained one of the least volatile currencies among its Asian peers in calendar year of 2022 and continues to be so this year also. Similarly, the depreciation and the volatility of the Indian rupee during the current phase of multiple shocks is far lower than during the global financial crisis and the taper tantrum. In a fundamental sense, the movements of the rupee reflect the resilience of the Indian economy.

 

The global economic slowdown is one major factor contributing to both the stock markets and the Indian currency fall. The Indian rupee falling due to the slowdown and has been unable to regain its value. Hence the conversion from USD to INR always makes for a loss. The rupee value against US dollar has always been a disappointment due to the global economic slowdown, causing abrupt losses to some of the businessmen.

 

According to media reports, the decision by the Organisation of Arab Petroleum Exporting Countries also known as OAPEC to reduce production and the decision taken by Persian Gulf nations to double the price of crude oil led India to borrow foreign currency. India had to borrow foreign currency that lead to another reason why is the rupee falling. In spite of being one of the strongest financial countries in the world, India falls in short of effective plans that will show a difference in the country’s economic status. On the other hand, US takes up very smart plans to cope with the current business strategies, hence taking over the entire world. USD vs INR is a never-ending debate that causes repercussions among the public. The value of USD to INR has been on high since the last two decades. Until a change has been brought in this system, the rupee value against US dollar will continue to go downslide.

 

The U.S. is the biggest importer of crude oil. When the crude oil prices go down, the U.S. saves more dollars in buying it. This strengthens the dollar and that leads to another reason why the rupee is falling against the dollar.

 

(The author is a regular columnist and can be mailed at [email protected])

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