A Simple Guide to Understanding India Exchange Rates

  • Posted by Jason on June 30, 2014 in Global Economies

Currency exchange isn’t a topic that gets much attention, but it’s a topic dear to the heart of many expats. The India exchange rate is something we often calculate when shopping or eating out in our host countries. The rupee’s strength combined with the strength of your host country’s currency can make a big difference in how much money you can send home. Since it’s difficult to understand  Indian currency and why exchange rates are the way they are, here’s a brief explanation of some of the factors that cause the rupee to go up or down.

Understanding India currency exchange rate

Global Economy

As we all know, India is a growing powerhouse with an economy that is becoming more and more interconnected with the rest of the world. As this happens, India’s economy also becomes more dependent on the global economy. If the economies of India’s main trade partners aren’t doing well, then India is also affected and the rupee is likely to become weaker due to pessimism in its economy. On the other hand, if the economies of India and its key trade partners are doing well, the optimism often translates into a stronger rupee. Of course, it’s a little more complex than that – let’s look at some of the other factors.

Infrastructure and Rural/Urban Divide

Infrastructure is one other factor affecting India’s currency exchange rates. As India’s economy grows, the need for a dependable infrastructure becomes more and more important. If the development and expansion of infrastructure such as railways, highways, and the electrical grid are not improved and expanded, then this affects business development, which also affects the rupee.

Another factor is the stark contrast between urban and rural populations. Since almost 70% of Indians live in rural areas and have limited access to running water and dependable electricity, a high percentage of Indians have been left behind as India’s economy develops. As the urban population increases and India becomes more developed, the rupee will also strengthen.

Reserve Bank of India (RBI)

Another factor that strongly affects the rupee is the Reserve Bank of India (RBI). It is India’s central bank and is tasked with the responsibility of controlling India’s monetary policy. In order to control inflation and keep the rupee at a consistent rate, they use techniques such as issuing new currency and increasing interest rates. If the RBI raises interest rates too high or issues too much currency, the rupee becomes devalued. The RBI also manipulates the price of the rupee by trading in the US dollar/rupee forex. Although it is impossible to truly manipulate the price of the rupee, they can affect its value temporarily by trading large amounts.

Conclusion

Now that you know the main factors that affect the Indian exchange rate, you’ll have a better idea of why the rupee is high or low. But another factor not to forget is your host country’s currency. If it is high and the rupee is low, then you can send a lot more home. But if it is low and the rupee is high, you won’t be able to send as much. As with India, your host country’s currency is also affected by similar factors such as its economy and inflation. If you stay attuned to what’s going on in both countries, you’ll never be surprised by the exchange rate when sending money online to India.

 



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