The economy of India is one of the fastest growing in Asia, next only to China. As one of the biggest economies in the world, India’s currency is affected by several factors. With globalization, financial markets all over the world are basically affecting each other. Although the movement of the forex rates in India is affected by the rise and fall of the entire global economy, the movement is largely dependent on India’s economic conditions and policies.
In order to fully understand the rise and fall of the forex rates in India, there is a need for a deeper understanding of the domestic economic indicators. These influences may be used as a mechanism to gauge the trend in financial market.
Gross Domestic Product
The Gross Domestic Product (GDP) is primarily the measure of the overall performance of a country’s economy. It determines the country’s monetary policies, currency value as well as the prices in the stock market and other economic indicators used to assess the domestic market. Therefore, it possesses the strongest impact on the forex rates in India.
The growth of India’s Gross Domestic Product can be largely attributed to the country’s open policies that have attracted the influx of foreign investors over the past decade. The growth of India’s service industries and BPO sectors influenced by stronger information technology has significantly contributed to the impressive growth of the country’s GDP.
Inflation is the master index of the purchasing power of a country’s national currency, in which higher inflation means lesser purchasing power. With a rising inflation rate, the forex rates in India increases, thus weakening the purchasing power of the local currency. However, inflation can be controlled by India’s central bank by increasing or decreasing interest rates in order to support the currency’s value. The increase in the interest rates will support the rupee, thus, lowering the forex rates in India. Inversely, lower interest will reduce the demand for the local currency, thus, increasing foreign exchange rates.
The country’s domestic trade balance highly influences currency movements, thus affecting the forex rates in India. If India registered more exports than imports, it means that the country is experiencing a trade surplus, thus supporting local currency gains. When this happens, you will notice that the forex rates in India decrease because of the strengthened local currency. On the other hand, when the country experiences trade deficit, that is when imports exceed exports, the local currency weakens. During such period, the forex rates in India increases.