Why is the USD to INR Exchange Rate up today on 31st August 2022 (2nd half of August 2022)?

A consensus among economists and analysts is that the Indian economy is relatively better when compared with other countries. However, the Indian currency is not reflecting their statements. India had the highest GDP growth in July. However, this growth has to continue over three financial quarters to affect the Indian economy and its currency positively. The Reserve Bank of India (RBI), along with the Indian government and other supporting agencies, have devised several tactics and measures to help bolster the Indian economy. One such act was to increase the repo rate by 50 basis points. While this has helped the currency gain some stability, it isn't enough.

USD to INR Exchange Rates
Date	Open	High	Low	Close
16-Aug-22	79.55	79.78	79.26	79.55
17-Aug-22	79.15	79.69	79.15	79.15
18-Aug-22	79.36	79.86	79.34	79.36
19-Aug-22	79.77	80.11	79.66	79.77
22-Aug-22	79.92	80.15	79.76	79.92
23-Aug-22	79.88	80.10	79.50	79.88
24-Aug-22	79.85	80.09	79.70	79.85
25-Aug-22	79.80	80.03	79.74	79.80
26-Aug-22	79.88	80.13	79.72	79.88
29-Aug-22	79.96	80.13	79.87	79.96
30-Aug-22	79.97	80.16	79.43	79.97
31-Aug-22	79.68	79.74	79.35	79.68

From the above graph and table, one can infer that a dollar has equaled an average of 79.78 rupees, which is higher than the average for the first two weeks of August. It suggests that the rupee's performance has gone down. The rupee hit a bottom of 80.16 on the 30th of August 2022 and a peak of 79.14 on the 17th of August 2022. The exchange rate decreased from the 16th of August to the 17th of August. However, it has been increasing ever since. The dip on the 31st of August 2022 can be seen as a positive sign. However, it is specious. This increasing volatility is a sign of worry. The currency's value differed positively or negatively by an average of 0.09 rupee daily in the past two weeks(the 16th of August 2022 to the 31st of August 2022). Such a high variance shows the weakness of the rupee. The government and the RBI are doing everything in their power to help improve the currency's value. However, it will take time.

If the currency has to be solid and stable, there are so many factors that have to perform relatively well. They are:

1. Crude Oil

The United Arab Emirates, Saudi Arabia, Kuwait, Qatar, and Russia are vast exporters of crude oil. Most countries purchase crude oil from these countries. Since Ukraine- Russia conflict has unfolded, trade barriers have been imposed. It has had severe consequences on the import-export balance of several countries. Since a country's economy and currency depending on the trade balance and crude oil purchase, these trade barriers have adversely affected several countries' economies. The prices of crude oil have come down. From the all-time of $120 per barrel to an average of $80 to $90 per barrel. While there has been a significant price reduction, this is still higher than the average historical price. India is the most populous country in the world and imports over 85% of crude oil from other countries. In the first quarter of the financial year 2022- 23, India imported 60.2 million tonnes of oil worth $47.5B. It was significantly higher by 89% than the amount spent in the previous quarter (fourth quarter of the financial year 2021-22). The US also depends on other countries for crude oil as they import more than 70% of their simple oil demand from other countries.

From the graph and table below, it is evident that the prices have been increasing. However, there has been a dip in the cost from the 29th of August 2022. On the 30th of August 2022, the prices peaked at $97.66 per barrel. On the 16th of August 2022, the prices reached a low of $85.73 per barrel. Every manufacturing, transportation, and related industries depend highly on crude oil. Such costs can hinder production, raising inflation and devaluing the Indian currency.

Crude Oil (in USD)
Date	Open	High	Low	Close
16-Aug-22	87.93	90.65	85.73	86.53
17-Aug-22	87.10	89.16	85.88	88.11
18-Aug-22	87.39	91.46	87.32	90.50
19-Aug-22	90.39	92.09	88.38	90.77
22-Aug-22	89.65	91.26	86.60	90.23
23-Aug-22	90.55	94.22	90.42	93.74
24-Aug-22	93.78	95.40	92.79	94.89
25-Aug-22	95.35	95.76	92.29	92.52
26-Aug-22	93.06	94.02	91.08	93.06
29-Aug-22	92.96	97.37	92.29	97.01
30-Aug-22	96.9	97.66	90.54	91.64
31-Aug-22	92.31	92.73	88.27	89.55

2. Gold imports

Gold is one of the most preferred commodities. The aftermath of the coronavirus pandemic has made people take precautionary measures to safeguard their financial stability. Thus, people have been buying gold as much as they can. The demand for gold has increased significantly in the year 2022. The market in the first quarter of 2022 has increased by approximately 45% from last year's first quarter. This significant rise in demand has led to a stark increase in the inflation rates. Thus, to curb this rising inflation, the RBI decided to hike the gold import tax from 10.75% to 15% to try and curb the gold imports.

From the graph and table below, one can see that the prices of gold have been decreasing. On average, gold costs $1746 per ounce. This average has reduced significantly from the average price of $1780.73 per ounce in the first two weeks of August. On the 16th of August 2022, gold price reached a high of $1777.40 per ounce. It got a low of $1708.50 on the 31st of August, 2022. The inflation rates increase with the increase in gold imports. Thus, the country needs to reduce gold imports.

Gold Rate (in USD)
Date	Open	High	Low	Close
16-Aug-22	1,777.40	1,777.40	1,771.40	1,773.20
17-Aug-22	1,769.70	1,769.70	1,760.00	1,760.30
18-Aug-22	1,762.90	1,762.90	1,753.40	1,755.30
19-Aug-22	1,753.70	1,754.30	1,747.50	1,747.60
22-Aug-22	1,740.50	1,740.50	1,726.50	1,734.00
23-Aug-22	1,738.00	1,748.90	1,731.90	1,746.80
24-Aug-22	1,745.00	1,751.80	1,743.60	1,747.80
25-Aug-22	1,761.60	1,761.80	1,755.00	1,757.70
26-Aug-22	1,754.00	1,755.00	1,736.10	1,736.10
29-Aug-22	1,732.40	1,741.20	1,732.10	1,736.60
30-Aug-22	1,736.40	1,739.00	1,720.70	1,723.20
31-Aug-22	1,718.30	1,720.90	1,708.50	1,712.80

3. GDP & Import/Export

The gross domestic product (GDP) and the import-export balance are interrelated. Both these factors affect the country's currency and economy—every country imports and export goods. When the imports exceed the exports, the value of the currency decreases. On the other hand, when the exports exceed the imports, the value of the currency increases. When the currency's value drops, the currency's buying power decreases. The GDP, dependent on the currency's purchasing power and consumer spending and consumption rates, devalues the money when the buying power goes down. The graph below shows that the trade deficit gap has been widening unpredictably. From April 2022 to June 2022, the imports and exports had a linear growth making an almost negligible difference in the trade deficit. India had a shortage of $9.525M in June 2022. In the past, the exports have been higher than the imports; however, in July 2022, India's imports were higher than its exports. It poses a worrying sign.

India: Imports & Exports (in US$ Million)
Date	Export (US$ Million)	Import (US$ Million)
Jun-21	20.30	10.84
Jul-21	19.36	11.39
Aug-21	20.46	11.87
Sep-21	21.61	12.58
Oct-21	19.85	11.61
Nov-21	20.14	12.59
Dec-21	25.31	14.89
Jan-22	21.63	13.24
Feb-22	21.30	12.97
Mar-22	26.95	15.35
Apr-22	22.59	14.05
May-22	23.61	15.20
Jun-22	25.29	15.77
Jul-22	20.2	22.3

GDP Rate in India
Date	Rate (%)
Jul-19	6.25%
Aug-19	6.00%
Jun-19	5.75%
Aug-19	5.40%
Oct-19	5.15%
Mar-20	4.40%
May-20	4.00%
May-22	4.40%
Jun-22	4.90%
Jul-22	13.5%

Since the country's imports are higher than its exports, the currency has lost its buying power. It has led to such a poor performance. Though the currency's value has decreased, the GDP has increased significantly from 4.9% in June 2022 to 13.5% in July 2022. India has had the highest GDP growth of all the world countries. It is due to the efforts of the Indian government and the RBI. The RBI expects the GDP to gain stability and growth by 2023. It is a very positive sign for the Indian economy.

4. Inflation rates

Inflation also affects the currency's value. The general theory is that inflation increases when the GDP decreases. A rise in inflation reduces the value of the money. In July, the GDP increased quite significantly. It has reduced the inflation rate from 7.01% in June 2022 to 6.71% in July 2022

India's Inflation rates
Date	Percentage
Jun-21	6.26
Jul-21	5.59
Aug-21	5.3
Sep-21	4.35
Oct-21	4.48
Nov-21	4.91
Dec-21	5.66
Jan-22	6.01
Feb-22	6.07
Mar-22	6.95
Apr-22	7.79
May-22	7.04
Jun-22	7.01
Jul-22	6.71

US Inflation rates
Date	Percentage
Jun-21	5.4
Jul-21	5.4
Aug-21	5.3
Sep-21	5.4
Oct-21	6.2
Nov-21	6.8
Dec-21	7
Jan-22	7.5
Feb-22	7.9
Mar-22	8.5
Apr-22	8.3
May-22	8.6
Jun-22	9.1
Jul-22	8.5

Similarly, the United States also experiences inflation. They faced an all-time inflation rate of 9.1% in June 2022. The US Federal Reserve increased the repo rates by 75 basis points to help reduce inflation. The attempt worked, as the rates decreased to 8.5% in July 2022. The repo rates are expected to grow until the economy gains stability and momentum. Since the US has performed relatively better in these parameters compared to India, the exchange rates are very high.

5. Interest rates

In July 2022, the RBI increased the repo rates by 50 basis points to curb the inflation rates. The interest rate increased from 4.4% to 4.9%. An increase in the repo rate leads to a rise in banks' lending and borrowing rates. Higher interest rates are believed to bring in a lot of cash inflow, which can help support the Indian economy. In 2020, the rates hit an all-time low of 4% due to the coronavirus pandemic. In August 2022, due to the increase in the repo rates, the interest rates have been increased to 5.4%. The RBI is expected to increase the repo rates further this year.

RBI Bank Interest Rates
Date	Rate (%)
Feb-19	6.25%
Apr-19	6.00%
Jun-19	5.75%
Aug-19	5.40%
Oct-19	5.15%
Mar-20	4.40%
May-20	4.00%
May-22	4.40%
Jun-22	4.90%
Jul-22	4.90%
Aug -22	5.40%

Like the RBI, the US Federal Reserve also increased the interest rate to help curb the rising inflation rates. They raised their repo rate by 75 basis points. As of July 2022, the interest rate has increased to 1.58%. This increase led to a reduction in the inflation rate from June to July. The stark difference in India and the US performances has led to the bad performance of the Indian rupee against the dollar.

US Fed Interest Rates
Date	Interest Rate
Jun-21	0.08
Jul-21	0.10
Aug-21	0.09
Sep-21	0.08
Oct-21	0.08
Nov-21	0.08
Dec-21	0.08
Jan-22	0.08
Feb-22	0.08
Mar-22	0.20
Apr-22	0.33
May-22	0.77
Jun-22	1.21
Jul-22	1.58

6. Foreign and Domestic Investment

Since there has been an increase in the interest rate, the belief is that foreign investments will also increase. It will have both advantages and disadvantages. That is, when the RBI purchases more foreign currency, the value of the rupee decreases, whereas, when the RBI sells more foreign currency, the value of the rupee increases. . In the financial year 2021-22, Individuals and Corporates made around $83B worth of foreign investments. The financial year 2022-23 will cross-assets worth more than $100B. It could only suggest that the value of the rupee is expected to depreciate further.

India's FDI
Date	FDI (US$ Million)
Aug-21	6233
Sep-21	4505
Oct-21	3719
Nov-21	4390
Dec-21	3911
Jan-22	6388
Feb-22	4617
Mar-22	4593
Apr-22	6459
May-22	6152
Jun-22	3978

The graph below suggests that the FDI equity inflow has been very volatile. While the influx increased from March to April, it decreased to a low of $3978 Million in June 2022. The FDI inflow is expected to decline unless the Indian economy regains stability. The Indian economy and currency will gain strength and momentum in 2023 or 2024.

With several intricate and interdependent factors and details, it is hard to pinpoint one aspect responsible for this poor performance. While the government and RBI are trying many things to help bolster the economy, it is our responsibility to cooperate. The economy and currency are expected to gain stability and positive momentum by 2023.