InvestorQ : Why does the rupee move and what moves the Dollar-rupee exchange rates?
Niraj Mehta made post

Why does the rupee move and what moves the Dollar-rupee exchange rates?

Mary Joseph answered.
3 years ago

Like any currency, the Indian Rupee is also a reflection of the fundamental strength or otherwise of the Indian economy. Over a longer period of time, the INR has weakened against the US Dollar, but in the shorter term the INR is impacted by a lot of technical factors and demand/supply actors. Let us look at the 5-year chart of the Indian rupee vis-à-vis the US Dollar.


Source: Bloomberg

As the above chart indicates, the INR has depreciated against the dollar from a level of Rs.58/$ in late 2013 to a level of Rs.74.5/$ in October 2018 before it stabilized and improved to around the 71/$ mark. What is it that drives the rupee in such circumstances? That is actually quite a calibrated move but within this five year time frame, there have been periods of extreme volatility. For example, between May 2013 and September 2013 the INR fell sharply from 54/$ to 66/$ as the US decision to taper its bond portfolio led to debt outflows to the tune of almost $12 billion. Since January 2017, the Rupee has appreciated sharply from a level of 68.5/$ to 63.5/$ as the US appeared to be veering towards a more benign monetary policy. Post August 2018, the rupee crashed from 64/$ to 74/$ as worries like the trade war, likely devaluation of the Chinese Yuan, liquidity issues caused by the IL&FS fiasco etc took its toll on the rupee. The rupee is not only volatile over a longer period of time but it also continues to be volatile on an intraday basis.