Strengthening of dollar against the rupee has been quite ‘mild’, government sources said on Saturday. In comparison to previous major three occasions (2013 - Taper Tantrum, 2008- global financial crisis and 1997-98 Asian financial crisis), this time, the fall is much muted, they said.

These remarks come at a time, when the rupee is down to 79.74 a dollar on July 15 as against 74.50 at the end of last year. This means dollar has strengthened by about 7 per cent in the calendar year till date. On Thursday, the rupee breached the psychological level of 80 during intra-day trade.

Global strengthening

“The strength of the US dollar against the Indian rupee cannot be viewed as an isolated case. It is just part of the strength of the US dollar globally, against all currencies – developed or emerging,” a government source said. He said the strength of the US dollar has been uniform this year. It has appreciated against many other currencies. The US dollar index has gained 13 per cent this year against six major currencies– Euro, British pound, Japanese yen, Swiss franc, Canadian dollar and the Swedish krona.

The strength of the US dollar is due to the change in attitude towards risk-taking in the financial markets. When interest rates are low and dollar supply is ample, investors take risks. They invest in the stock markets of emerging economies like India. Indian stock markets gained a lot in 2020 and in 2021 because of the willingness to take risks on the part of international investors.

Further, rising inflation in the developed world has also affected the rupee. For example, retail inflation in the US hit 9.1 per cent in June, rising from 8.6 per cent  the month before and surging at the fastest pace in 40 years. Responding to higher inflation, the US Federal Reserve started raising interest rates from March. The hike resulted in dollar outflow from emerging economies, including India. This was further fuelled by the Russia-Ukraine war.

“On account of both these reasons, investors turned cautious. When they become cautious, they begin pulling money out of emerging markets like India. Foreign investors have pulled out nearly $31.5 billion totally from the beginning of 2021-22 and up to July 15 in 2022-23,” the source quoted above said.

The Russia-Ukraine crisis pushed the crude prices which resulted in more demand for dollar. All these factors have contributed to the strength of the US dollar against the Indian rupee. .

USD-INR during last three crises

During the Asian financial crisis, between August 1997 and August 1998, the US dollar strengthened by 22 per cent against the INR. In 2008 (global financial crisis) , from February to October, the dollar strengthened from ₹39.12 to ₹49.96 showing a rise of 28 per cent.   In 2013 (Taper Tantrum), from May 3 to August 28, the dollar strengthened from ₹53.65 to ₹68.80, a rise of 28 per cent.