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Rethinking Currency
Strength: Rohan Kekare
Why a comparison of INR Talent Acquisition Specialist, Godrej Properties Ltd
rohankekare07@gmail.com
to the USD is Wrong Batch- 2022-24
The Indian Rupee (INR) often comes under Understanding Currency Valuation
scrutiny for its depreciation against the US Dollar A currency’s strength is influenced by
(USD). Each time the INR hits a new low, media multiple factors, including economic growth,
inflation, interest rates, and trade balances. While
reports trigger panic, implying economic instability. the USD exchange rate is significant, it does not
But is this comparison truly fair? Evaluating the solely define a nation’s economic health. The USD’s
rupee against a single currency—especially one unique position as the world’s reserve currency
as dominant as the USD—provides an incomplete makes it an imprecise benchmark for assessing the
rupee’s true strength. A more accurate measure is
picture. A more balanced approach would involve the Real Effective Exchange Rate (REER), which
assessing the rupee’s performance against a broader evaluates a currency’s value against a weighted
range of global currencies. basket of multiple currencies, adjusted for inflation.
If the INR remains stable or appreciates in terms
of REER, its decline against the USD does not
necessarily indicate economic weakness.
The Global Strength of the USD
The rupee often appears weak due to the
relative strength of the USD. The global demand
for the dollar remains consistently high for several
reasons:
• Reserve Currency Status: Central banks worldwide
hold USD as a key component of their foreign
exchange reserves.
• Petrodollar System: Most global oil transactions
are conducted in USD, ensuring sustained demand.
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