Anomaly of Exchange Rates

Since the advent of globalisation, currencies of least developed, developing, and emerging economies, barring a few exceptions, have been constantly depreciating vis-à-vis the American dollar. If we look at the exchange rate of rupee vis-à-vis the dollar, in the last one year, the dollar has been appreciating, especially against the Indian rupee. In the past, appreciation of the dollar vis-à-vis the currencies of developing countries was being explained in more ways than one. It was argued that these currencies are getting weaker because these economies have been facing huge trade deficits, high rates of inflation, increasing external debt, weak performance of domestic production, etc. Upheavals in the exchange rates were being explained in terms of capital and financial outflows, global economic scenario, economic, technical, and political factors, etc, resulting in volatile exchange rates, which could hamper international trade and even economic stability.

These arguments were universally accepted to explain the exchange rates across the globe. We find that the rupee has depreciated from ₹59.64 to ₹68.12 per dollar between April 2014 and December 2016. Some analysts even argued that the rupee is still overvalued and there is a need for the rupee to depreciate further to stem the downfall in exports. Exporters’ lobbies made use of this argument to pressurise the government to weaken the rupee in the name of encouraging growth in exports.