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How Can the Rupee Strengthen Against the Dollar?

CC0 / / Indian rupee
Indian rupee - Sputnik India, 1920, 14.06.2024
India has witnessed unprecedented economic growth in the past few years. It has emerged to be the fastest-growing global economy, however, its currency continues to face a downfall compared to the US dollar.
The Indian currency exchange rate shows a slight decline against the US dollar as oil prices rise.
The Indian rupee opened flat at 83.54 per US dollar on Friday. The currency had depreciated 7 paise against the US dollar on Thursday because of high crude oil prices.

How US Dollar’s Dominance Can be Replaced

Talking about osin the value of the Indian currency, economist Sudhanshu Kumar of the Bihar Institute of Public Finance and Policy (BIPFP) told Sputnik India that only a little can be derived from the fluctuations in the rupee in recent months.

"Political developments in India have primarily affected these fluctuations, especially the general election. The formation of a government led by Narendra Modi is anticipated to guarantee continued policies to strengthen the Indian economy through necessary reforms," Kumar stated.

He further said that macroeconomic developments will also influence efforts to use alternative foreign exchange to the US dollar for international trade among certain nations.
The BIPFP economist said that the value of a country's currency is closely linked to its economy's health and a more robust economy leads to increased international acceptance of it, reflecting its value in global trade.
"This shift may replace the US dollar as the dominant international trade currency as other economies gain a larger share of global trade," Kumar said.

What Indian Government Can Do to Strengthen Rupee

Ever since the state gained independence, the rupee has depreciated. In 1947, it valued 3.30 against the US dollar and, as of now, it stands at 83.54.
Sharing his thoughts on what the government should do to strengthen its currency against the dollar, Kumar said that the Reserve Bank of India (RBI) has been managing the exchange rate to prevent significant and abrupt fluctuations in the rupee's value.
He further said that the rupee is expected to gradually depreciate over time because the RBI's involvement in the foreign exchange market has been asymmetric.

"Due to its limited role in the international export market, India needs to establish bilateral arrangements to promote wider acceptance of its currency for trade. Given the economy's smaller size, bilateral negotiations are crucial to ensuring transactions in rupees," the economist highlighted.

The economist also said that the US dollar can further weaken if trade among the countries in local monetary units continue to grow.

"Multiple diplomatic platforms are increasingly discussing using an alternative to the US dollar for international trade. The US dollar indirectly puts a premium on other economies when paying for imports," he opined.

As the use of alternative currencies increases, the demand for the US dollar will decline, impacting its value, he concluded.
Meanwhile, last week, the Indian rupee surged 38 paise to hit a three-month high of 83.04 against the US dollar, mainly due to robust sentiment in the stock market backed by exit polls predicting a landslide victory for the Bharatiya Janata Party-led National Democratic Alliance (NDA).
Moreover, the stock market has been performing well since Narendra Modi took oath for his third consecutive term following his victory. Despite this, the Indian rupee has not risen against the US dollar.
However, in recent times, India has worked to expedite trade in local money with various countries – including Russia and, most recently, India and China agreed to trade in domestic currencies to the Maldives too.
Apart from this, India’s Foreign Affairs Minister S. Jaishankar said last month that the "salience" of the dollar would be "diluted" in coming years.
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