Rupees are used in a number of countries including India and Pakistan. The Indian currency is issued by the Reserve Bank of India (RBI). The Indian rupee exchange rate is measured against six currency trade weighted indices. These currencies belong to countries that have a strong trade relationship with India.
The exchange rate of the Indian rupee (or INR) is determined by market conditions. However, in order to maintain effectiveexchange rates, the RBI actively trades in the USD/INR currency market. The rupee currency is not pegged to any particular foreign currency at a specific exchange rate. The RBI intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy.
History of the Rupee
Historically, the Indian rupee was a silver-based currency, while the major economies of the world were following the gold standard. The value of the rupee was severely impacted when large quantities of silver was discovered in the US and Europe. After independence, India started following a pegged exchange rate system. The country was forced to go through several rounds of devaluation from the 1960s to the early 1990s due to war and balance of payments problems. The rupee was made convertible on the current account in 1993. The Indian currency is set to be made fully convertible in phases over the five years ending 2010-2011.
In June 2008, the rupee appreciated to a ten-year high of US$39.29. The stability of the Indian economy attracted substantial foreign direct investment, while high interest rates in the country led to companies borrowing funds from abroad.
The global financial crisis exerted pressure on crude oil prices, which gradually plummeted to below $50 a barrel. Due to this, dollar inflow declined, with oil companies and investors purchasing more and more dollars. Persistent outflow of foreign funds increased the pressure on the rupee, causing it to decline. On March 5, 2009, the Indian currency depreciated to a record low of US$52.06. The US dollar's gains against other major currencies also weighed on the rupee.
At March end, the rupee stood at:
I USD = 50.6402 INR
1 Euro = 67.392 INR
1 Pound Sterling = 72.4022 INR
100 Japanese Yen = 51.3776 INR
Market Influence on the Value of the Rupee
The value of the rupee depends on PPP (or purchasing power parity), which reflects the quality of life that can be maintained at a particular standard level of income. Another major factor influencing the value of the rupee is the stock market. An overvalued index results in the overvaluation of the rupee.
Indian Rupee versus US Dollar: Historical Trend
The exchange rate trend between the rupee and the US dollar over the five years to 2009 (as on January 1):
1 US$ =
2005: 43.27 INR
2006: 44.95 INR
2007: 44.11 INR
2008: 39.41 INR
2009: 48.58 INR