JU Economics Class of 71-76

JU Economics Class of 71-76

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Operating as usual

20/10/2022

Now lets analyse if USDollar is flying or Rupee is falling ....

*Basic Economics:*
There are around 200 countries in the world and each has its own currency and all currencies maintain exchange rate with currency of other countries.

Exchange rate of any currency depends upon supply and demand for that currency.

Now the question:
Whether Dollar is Strengthening or Rupee is weakening....

Check USD INR performance of last 1 year.
Oct 2021 : 1 USD = Rs 75
Oct 2022 :1 USD = Rs 82

Is it due to good performance of USD or due to bad performance of INR ?

To check this, we have to find -
1. How Rupee is performing against other major currencies of the world...
2. How other currencies are performing against USD...
If rupee is falling against other currencies also then we can say rupee is falling, but If other currencies are also falling against USD then the dollar is strengthening.

British Pound, Euro and Japanese Yen are the other major currencies of the world.

Lets check Rupee vs Pound
Oct 2021 - 1 GBP = Rs 104
Oct 2022 - 1 GBP = Rs 92 is falling....so in 1 Last Year Rupee has strengthened against GBP!

Let's check Rupee vs Euro
Oct 2021: 1 Euro = Rs 88
Oct 2022: 1 Euro = Rs 82
so Rupee has strengthened against Euro too !

Lets check Rupee vs Yen now....
Oct 2021 : 1 Yen = 0.65 Rs
Oct 2022 : 1 Yen = 0.55 Rs
so Rupee has strengthened against Yen also !!

In last 1 year Rupee has weakened against dollar but strengthened against all other major currencies!!
It gives indication that Rupee is not falling....

Lets check performance of these currencies against dollar now...

Dollar index that measures relative performance of dollar against 6 major currencies of world including GBP, Euro and Yen

Oct 2021: USD value against 6 major currency = 93
Oct 2021: USD value against 6 major currency = 112

So it proves that rupee is not falling, its actually dollar which is strengthening.

Rupee is fighting bravely against the dollar and performing better than other currencies....

What could be the reasons for this ?
Import of fossil fuel (petrol, diesel) covers 30-40% of our total import bill.
In last 1 year, due to Russia Ukraine war, prices of oil and gas have sky rocketed.
India import bill is getting higher as Oil is traded in USD.

Import high, export less means
demand of USD is high, demand of INR is less

So despite of such negative condition, INR is fighting bravely and performing well against other currencies.

Now let us understand the reason why Dollar is rising...

Reason is US federal reserve rate which was 0 in Feb 2022 and now its 3.5% !

Now try to understand this.
American banks need to maintain a fixed amount with US fed bank for their operations like any other central banks and for that on daily basis they keep taking loans from other banks and interest rate on that loan is called fed interest rate.

When fed increases that interest rate then all investors of the world, take out money from their current investments and invest into US fed bank coz investment in Fed bank is considered safest investment in difficult situations...
U can invest in fed bank only in USD so u need USD ! So the demand of USD increases and prices of USD go high and exactly this has happened in last 6 months repeatedly.

Why fed increased interest rate ?
To control the inflation and to minimize the liquidity.
As interest rises Interest rates of saving account and
FD also increase, Credit card, home loan interest becomes costlier....
People stop spending and start investing, Circulation of money goes down in market...
Demand in the markets goes down and prices come down....
Thus to control inflation US increased fed rates which led to demand for the US Dollar !
And USD strengthened against all currencies

Final conclusion:

It's USD is strengthening,
Rupee is not weakening.
but i must remind of one case when Rupee actually weakened and that happened in during 2008-14
Fed rates were 0 during 2010-14

And As dollar index from
2001-03 was like 2022
very strong ...
2008-14 was the time when dollar was weak against all those 6 currencies !!!

Now check performance of Rs and USD during
2008 -2014

2008 : 1 USD = Rs 40
2014 : 1 USD = Rs 63

Even when dollar was weak globally, Fed rates were 0, INR kept falling and fell around 50%
That's Rupee falling !!

Basic economics:
Irony of this country is that standard and intent of our Opposition leaders and journalist is so low that they don't miss any opportunity to defame their own country.

09/12/2021

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