18 January 2012
The value of any currency in an economy is hard to bet, to be stable for a long period of time as there are number of factor influencing its appreciation and the depreciation. The currency value of an economy influences the growth rate of GDP in an economy. Several other factors that have a direct influence on the over or the undervaluation of a currency are listed below:
Capital flows and the stock market of India It’s important to note that in spite of suffering recession, an economy can grow if the capital inflow is constant or continuously rising. In India even if the GDP rate is less, the currency can still get overvalued due to excessive capital inflows made by the FII’s in the Indian economy.
Global currency trends Like many other currencies Indian rupee have also tied its knot with some of the big economies of the world including the names of UK, US, Japan and Canada. The depreciation or appreciation in the currency any of these, especially in the US dollar, influences the valuation of the Indian currency in one way or the other.
RBI Intervention The valuation of the Indian currency highly depends on RBI that manages the ‘balance of payments’, slight modification in which can define the over or the under valuation of the Indian currency.
Oil factors India is a major importer of oil and the valuation of Indian money gets easily affected by the increase in the prices of the crude oil. It can further result in spreading inflation in an economy due to the over valuation of the Indian currency.
Political factors Several other factors that affect the currency stability are some political factors like change in the government set up, introduction of new export and import policies, tax rates and many more.
Conclusively, there are many factors that arise from the economic structure of Indian economy and affect the valuation of the Indian currency that in turn affects the economic growth rate of the economy of a country.
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