Why is the USD to INR Exchange Rate Down today on 13th January 2023 (1st half of January 2023)?

Key points:

• The dollar is worth less and less in India's currency as time goes on.
• The Federal Reserve has increased interest rates to 4% to slow inflation in the United States.
• The inflation rates in India and the United States seem to be trending downward.
• GDP in India has fallen in the most recent quarter.

Many anticipate that 2023 will mark the beginning of a period of growth for global economies. Economies worldwide are indeed struggling, but the American economy is starting to show signs of life. Despite India's GDP increasing by 13.5% last month, the rupee did not rise in value. The economic outlook for India is bright, according to experts. Annual, rather than quarterly, expansion is required. With help from the Indian government and other groups, the Reserve Bank of India (RBI) has developed plans and projects to boost the country's economy. The currency and economy have benefited from the government's decision to increase interest rates and restrict trade.

USD to INR Exchange Rate from 01-01-2023 to 13-01-2023

We found that the current rate of exchange places one US dollar at 82.25 Indian rupees. Prices were stable in the second half of December but have since slowed. It shows that the rupee has the potential to become a respected currency. On January 3, 2023, the rupee hit an all-time high of 83.03. On January 13, 2023, the value of one rupee dropped to an all-time low of 81.09. We are concerned about the long-term health of India's economy and currency due to the recent swings in the exchange rate. There has been a daily average fluctuation of 0.35 in value over the past two weeks. Efforts are made by the government and the Reserve Bank of India (RBI), the country's central bank, to maintain a stable value for the rupee. It's essential to remember that it may take some time to see results. Other countries have followed suit to combat inflation, including the Federal Reserve in the United States.

If the currency is to be solid and stable, several parts must work pretty well. These are:

1. Crude Oil
2. Gold imports
3. GDP & Import/Export
4. Inflation rates
5. Interest rates
6. Foreign and Domestic Investment

1. Crude Oil

More than 80% of India's crude oil requirements are typically met by countries like the United Arab Emirates (UAE), Russia, and Saudi Arabia. However, only 10–15 percent of India's trade goes through its ports. India has expanded its crude oil imports beyond traditional sources like Nigeria and Iraq to include countries like Gabon, Colombia, and Canada. The trade war between Russia and Ukraine, the worldwide flu epidemic, and the worldwide oil crisis have contributed to higher trade barriers. A barrel of crude oil has reached a record-high price of $120. A barrel of oil is now $80, down from its previous price of $70. By the end of the second quarter of 2022-2023, India had paid $722.54 million to Brazil for oil imports. More than 70% of the crude oil used in the United States comes from international sources.

The chart and table below show that prices have been decreasing over time. The cost of a barrel of oil rose from $72.46 on January 05, 2023, to $81.5 on January 03, 2023. The price has gone up since the beginning of the month. Crude oil is vital to the functioning of the modern economy and way of life. Workplace productivity losses, price increases, and a depreciating Indian rupee might all result from this.

Crude Oil Prices from 01-01-2023 to 13-01-2023

2. Gold imports

Gold has taken on a symbolic significance for the people of India due to its widespread use in jewelry. People in 2022 started hoarding gold because they hadn't done so during the pandemic. India's economy suffers as inflation rises and gold imports increase. The government responded by imposing a 15% tax on all gold imports, up from the previous rate of 10.75%. Low prices have more than compensated for the higher taxes, so people continue to buy gold despite the increase.

The accompanying table and graph illustrate the fall in gold prices. The current price of gold, at $1803.38, is higher than the average price for November's last two weeks combined. From January 5-13, 2023, the cost of gold fluctuated between $1920.90 and $1834.80. An increase in overseas gold imports directly triggers inflation. The Federal Reserve should cap the amount of gold the government can purchase.

Gold Prices from 01-01-2023 to 13-01-2023

3. GDP & Import/Export

The effects of the trade deficit on GDP are multifaceted and interconnected. A country's currency and economy are responsive to changes in its import and export patterns. When imports surpass exports, the currency's value declines, and when the opposite occurs, the currency's value rises. Holders of a currency suffer when its value drops because they can no longer buy as much with their funds. The result will be a decrease in GDP.

You can see how tricky it is to predict the size of the trade deficit in the following chart. The percentage increase in imports from India was particularly dramatic between March and July. However, the outlook is improving. In October of 2022, exports surpassed imports in value. India's trade deficit grew by $8.7m due to this increase in surplus. The disparity between exports and imports has always stood out. Anyhow, September's positive delta is promising.

India’s Import/Export from Mar 2022 to Nov 2022

India’s GDP from Jul-2021 to Oct-2022

As the country's trade deficit widened, the value of its currency had to decline. The effectiveness of regular activities is suffering as a result. The Gross Domestic Product increased from 5.4% in February 2022 to 13.5% in July 2022 despite the currency's value drop. The Indian economy has been expanding at unprecedented rates. The Indian government deserves credit for the plan's success. By 2023, slower growth is expected at the very least, according to the RBI. By doing so, one can learn a great deal about the state of the Indian economy. Only after this pattern has held for three consecutive calendar quarters will the currency value increase.

4. Inflation rates

When GDP declines and inflation rises, the value of a currency can go up or down. July 2022 annual inflation rate was 6.71 percent, down from June 2022's 7.01 percent. But by December of the following year, the rate had dropped to 5.7%. Compared to the robust expansion of the economy, that is unacceptable. As a result of their interdependence, it takes work to pin down a single factor responsible for this variation.

Inflation Rates in India from Dec 2021 to Dec 2022

Inflation Rates in the US from Dec 2021 to Dec 2022

The United States and India both suffer from inflation. In May of 2022, the annual inflation rate in the United States reached 9.1 percent, a new high. The Federal Reserve raised the repo rate by 75 basis points to combat inflation. Inflation dipped to 7.1 percent in November 2022, its lowest level in three years. The United States performed better than India, as reflected by the dollar value relative to the Indian rupee.

5. Interest rates

To combat rising prices, the Reserve Bank of India increased its repo rate by 50 basis points in July 2022. The interest rate increase was from 4.4 percent to 4.9 percent. When the repo rate rises, banks demand higher interest rates on deposits and increase their lending rates. To stimulate the Indian economy, many people believe that raising interest rates will be beneficial. The 2020 coronavirus pandemic caused the slowest recorded speed of 4%. After the repo rate went up to 5.25% in August 2022, interest rates went up to 5.4%. The interest rate will rise to 6.50% in December 2022. It is widely accepted that the Reserve Bank of India (RBI) will increase the repo rate again this year.

Interest Rates in India from Jun-2019 to Dec-2022

The Reserve Bank of India and the Federal Reserve of the United States have recently increased interest rates to curb inflation. There was a massive 75% hike in the repo rate. As of October 2022, the interest rate is now 4%. As a result of the improvement, inflation has decreased. Widespread belief holds that the Federal Reserve will maintain its rate-hiking policy for as long as it deems necessary to ensure the prosperity of the U.S. economy. The Indian rupee's decline against the U.S. dollar is mainly attributable to the two countries' vast cultural and linguistic gaps.

Interest Rates in the US from Aug-2021 to Oct-2022

6. Foreign and Domestic Investment

The level of foreign direct investment rises with interest rate rises (foreign direct investment). The benefits and drawbacks of this circumstance are comparable to those of any other. By increasing its purchases of foreign currency, the RBI will reduce the value of the rupee. The RBI's decision to increase the sale of foreign currency has boosted the value of the rupee, which has led to an increase in the amount of money being invested abroad from 2021 to 2022, to the tune of about $83 billion. In the fiscal year 2022-23, the RBI will receive more than $100 billion in assets. It may be the first step in a gradual devaluation of the rupee.

The following graph illustrates the cyclical nature of FDI equity inflows. Revenue increased from March to April but dropped to $2,974,000,00 by September 2022. Once the Indian economy improves, foreign investment is expected to decline further. In 2023 or 2024, India's economy and currency will surge forward and strengthen.

FDI in India from Oct-2021 to Sep-2022

India's finance minister has said, "There has been an increase in the dollar's value. The rupee's value will remain stable." Given the preceding, it follows that the second sentence is accurate. The Reserve Bank of India (RBI) in India and the Federal Reserve System (Fed) in the United States are vital institutions for their national economies. The value of the Indian rupee and the economy of India are both vulnerable to events occurring in other countries. It looks into a wide range of possible causes, many of which are related, to determine what's happening with poor performance. However, the government and the Reserve Bank of India are acting to bring things back under control. If we all chip in, we can increase the odds of sustained economic growth and a stable currency through 2023.