Why is the Dollar higher in value than the Rupee? (2024)

The Indian Rupee is valued less compared to the US Dollar. The value of one Dollar to one Indian Rupee fluctuates, referred to as the exchange rate. In the global foreign exchange market, the exchange rate changes every day, and it is an essential indicator of a country’s economic strength. Imports become more expensive as the value of a foreign currency rises, whereas exports become less expensive.

The US Dollar is higher than the Rupee for various reasons. India imports commodities from the US instead of exporting on its own which is why the value of the Dollar is high due to the number of exports. Under this circ*mstance, the demand for Dollars rises since the US will receive more cash inflow in the form of Dollars because of the positive balance of purchase and the balance of the capital account.

The Flow Of Foreign Capital

Any country which is at a developing stage needs to have foreign capital or any form of borrowing capacity to grow economically. Investment made in a country by investors of foreign firms is termed as foreign capital.

These investments can be made in the form of assets, shares and deposits. Foreign capital investments are of two types; Foreign Direct Investment and Foreign Institutional Investment. The capital any other country invests in our country is termed as foreign capital; it is not only limited to borrowing but investing as well.

Key takeaways

• A foreign investor’s investment in domestic enterprises and assets of another country is foreign investment.
• Large multinational firms will create and extend their investment in other nations to explore new prospects for economic growth.
• A long-term physical investment made by a corporation in a foreign country, such as establishment of plants or purchase of a building is termed as foreign direct investment.
• Commercial loans are another sort of foreign investment, and they consist of bank loans issued by domestic banks to enterprises or governments in other countries.

Supply of Dollar

Supply and demand factors highly affect the value of the Dollar. The goods that are exported by the US generate the demand for Dollars because customers pay for their purchases using the currency.

The supply of Dollars is created when the United States exports the product or service and creates a demand for it in return. When developing nations buy anything from the US, they have to convert their local currency into Dollars to make the payment. When big American corporations issue bonds to raise capital, which is then purchased by foreign investors, then those payments are also to be made in Dollars.

Net Capital Outflow

Net capital outflow can be defined as the investment of funds in a different country. A country usually invests its funds abroad for a certain period of time and it is referred to as net capital outflow. It means that the country invests abroad more than it invests in its own nation. In simple terms outflow can be defined as the capital taken out of the country for buying foreign assets. Savings minus investment is considered as capital outflow.

Foreign direct investment entails actively managing the assets or interest purchased, whereas portfolio investment does not require management involvement.

In this circ*mstance, demand for the US Dollar will initially increase as more Dollars will be paid to the US when purchasing goods from them. More Dollars will have to be obtained on the Indian foreign exchange market in order to pay for any item.

As a result, an open economy can purchase and sell assets on the financial market, resulting in capital flow.

When there is a positive net capital outflow, residents buy more foreign assets than foreigners acquire domestic assets. When the index is negative, foreigners buy more domestic holdings than locals.

The Reason Why the Dollar is Higher Than the Rupee

The Dollar is the most demanded currency in the world because of heavy exports to different nations. One of the reasons why the Rupee is cheaper than the Dollar is because of India’s fiscal deficit. The use of crude oil, rise of gold prices, the boom of Chinese imports, Indians going for US tours, imported cars, electronics etc. are some of the reasons why the Dollar is higher than Rupee.

Value of any currency depends on its demand in the market. The US is the biggest economy in the world and contributes to around 25% of the world economy. Most of the crude oil and important sources of energy is traded through Dollars. Furthermore, the US has the highest number of MNCs and has major trade relations with other countries.

Conclusion

The demand for the Dollar is higher in those countries which import more than it exports. India, for example, imports more than it exports which is why 1 USD is currently worth 73.28 INR, and the value keeps on changing every minute. Smaller and less industrial countries like the Bahamas, where 1 Bahamian Dollar equals 1 USD, have this relation because they are less reliant on imports such as crude oil, whereas India imports crude oil in excessive quantities. A currency’s value sometimes is not an accurate indicator of its economic health; other aspects include low inflation, good GDP, and suitable employment.