Global financial markets may be nervously eyeing a potential downturn in the Indian Rupee against the US Dollar, but a slowdown in the global economy does not appear to have much bearing on the future of the American dollar and its value against the Indian Rupee. Several countries have devalued their currencies against the USD in recent times, which shows that this is not a universal phenomenon. But there is a ripple effect.
Over the past few months, we have seen the American dollar gain against several major currencies, including the Australian Dollar, Canadian Dollar, Japanese Yen, Swiss Franc, British Pound, Swiss Franc, Euro, New Zealand Dollar, South African Rand, and even the Mexican Peso. This trend, too, has now started to slow.
It would be wrong to expect that the Indian Rupee will hold steady in the face of what appears to be a levelling off of the currency valuation against the USD, or that it will act as a stabilizing force and prevent further erosion of the real value of the American dollar. There is still a lot of uncertainty in the financial markets and the USD may continue to fall against the Indian Rupee.
However, if a sudden collapse in the price of commodities or other imports causes a spill over effect on the export sector, or if there is a severe deterioration in the US economy, then the situation could become more volatile. As such, there is a chance that the US Dollar could rise against the Indian Rupee and maintains its current level. Hence, the Indian Rupee gains by having gained over the past few months.
If the Federal Reserve starts to raise interest rates and the economy hits rough seas, then the US Dollar will fall against the Indian Rupee as it sees it as being the lesser of two evils in the face of inflation, a possible devaluation of the Indian Rupee, and a recession in many parts of the world. There is a possibility that the Indian Rupee may come under pressure against the US Dollar due to rapid depreciation against other major currencies.
If the Indian Rupee starts to appreciate, the scenario could become more volatile, making the Indian Rupee strong as a result of a rather large fall in the USD against the Indian Rupee. If inflation hits India, there is a chance that the Indian Rupee may appreciate further against the USD, thus potentially destabilizing the economy. There is a chance that the Indian Rupee might appreciate against the Swiss Franc, Swiss Yuan, Euro, Australian Dollar, Japanese Yen, and British Pound, and hence deteriorate the economic situation.
In case the US Dollar keeps on gaining against the Indian Rupee, there is a chance that the Indian Rupee might appreciate, putting the economy under extreme pressure, leading to political and social instability. This would happen only if the US economy did not see a major disruption due to inflation or any other external factor.
If a large number of countries to devalue their currencies against the USD, there is a risk that the US Dollar might see a decline against the Indian Rupee, forcing it to appreciate or depreciate against the Indian Rupee, causing a risk of a currency war. The currency war scenario would make the Indian Rupee stronger, causing it to appreciate against other major currencies, even more than before.
It is a well known fact that there is little chance that the currency value of countries can survive if their currencies are experiencing a significant appreciation against the USD. Only if a country devalues its currency against the USD does it benefit from a large depreciation of the currency and thus appreciate significantly against the currencies of other countries.
The above scenarios demonstrate that the Indian Rupee gains and losses are driven by the failure of the US Dollar to depreciate or appreciate, or stay in a stable state of near equilibrium. To be in sync with these conditions, the Indian Rupee needs to remain in the currency market rather than have a negative outlook.