Macroeconomic Analysis of the Indian Rupee over the US Dollar - Research Paper Example

Hence, it can be stated that the movements of exchange rates have vital implications over the national economy including its business cycle, trade and capital flows. Additionally, the exchange rate is often regarded as an important factor that influences the foreign economic policy of a country to a large extent (Dua & Ranjan, 2011). The paper intends to identify and analyze the Indian Rupee against the US Dollar over the five years period ending with 2010. Macroeconomic Analysis of the Indian Rupee over the US Dollar Macroeconomic fundamentals play a crucial role in the determination of the exchange rate.

This particular statement can be well interpreted with reference to the microeconomic context and currency fluctuations witnessed in India in recent years. India has witnessed enormous volatility in the recent decade which has resulted in the constant fluctuation of the Indian Rupee against the US Dollar. The fluctuation had been quite apparent during the period of 2005-2010 (Somaiya, 2008). For instance, during the year 2009, the Indian Rupee reached 48.32 against the US Dollar which was recorded to be the lowest exchange rate against the US Dollar over the five-year period ranging from 2005-2010; while, in 2007, the Indian Rupee was identified to be 41.

20 which was again observed to be the highest against the US Dollar for the stated five-year period (SignalTrend Inc, 2012). Source: (SignalTrend Inc., 2012) Since 1990, India has made several structural reforms with respect to its foreign exchange-related affairs. The major objectives of these reforms were fundamental to enhance the confidence level among the investors and thereby, maintain a degree of domestic competitiveness. Contextually, a major reason identifiable behind the appreciation of the Indian Rupee against the US Dollar for the period of 2005-2010 illustrates the occurrence to be a consequence of the increase recorded in the capital inflow of the nation.

The FDI equity inflow between 2005 and 2010 was identified to be seven times more than the previous five years i.e. 2000-2004 (Rao & Dhar, 2011). During the fiscal years from 2007 to 2008, the currency exchange rates in almost all the emerging markets including India had strengthened against US Dollar. According to the reports on currency and finance during the aforementioned period, The Indian Rupee was appreciated by 10.2 percent as of March 2009. However, it is worth mentioning that the Indian currency, in the five years period, has also depreciated dramatically in certain circumstances.

After the occurrence of Lehman’s bankruptcy, the Indian Rupee sharply depreciated, reaching the level of 50 INR/US$, in the month of October 2008. The depreciation in Indian Rupee was primarily attributed to the rise in the price of crude petrol and inflationary pressure prevailing within the country. Moreover, the declining exports and continuous outflow of nat6ional income also contributed towards the depreciation of the Rupee and appreciation of the US Dollar (Reserve Bank of India, 2009).

It is worth mentioning in this regard that the depreciation of the Indian rupee had dramatic impacts on the economy. Consequently, the depreciation resulted in higher import costs which ultimately lead towards the price rise of import commodities such as crude petrol and industrial raw materials pushing the inflation rate upwards within the microeconomic structure of India (The Associated Chambers of Commerce and Industry of India, 2012).