Rupee exchange rate is a great question, one which I thought about for many years. I believe we are in the midst of a sea change.
If you look at a multi-decade chart, the Rupee has certainly lost most of its value relative to other currencies (USD, Euro, etc). That's primarily because India's inflation over the decades has been higher than that of western countries + India's trade deficit.
All this is changing. Surprising many investors, the Rupee was quite flat from October 2022-August 2024. The Reserve Bank of India is controlling the exchange rate by buying and selling in the forex markets. All this costs $$. As India's exports grow (services + goods exports), India's forex reserves will swell, just as China's did in the 1990s and 2000s. As India's forex reserves swell, the RBI has more firepower to control the exchange rate and keep the rupee stable, which anyways is a necessity since India wants to become an export powerhouse and replace China. (A stable currency helps Indian manufacturers buy raw components and sell finished goods).
Now of course we've seen a recent bout of rupee weakness. For the time being, the RBI's firepower is limited. It could have kept the exchange rate flat over the past 6 months, but that would have cost hundreds of billions $$ more. India's forex reserves went down from I believe $700 billion to $630 billion during the recent USD rally. But the moment the USD stops rallying, you can expect India's forex reserves to rise again.
Long story short, historically rupee depreciation was a major concern. Priced in USD terms, the Indian stock market went nowhere in the 2010s. But I believe that is a thing of the past; as India's exports grow, the RBI's ability to keep the currency stable grows.
Subu, how are you participating in India market? Are you concerned about exchange rate as rupee continues to weaken against dollar over time?
Hi Deepinder, great questions.
I apply a momentum system for Indian equities.
Rupee exchange rate is a great question, one which I thought about for many years. I believe we are in the midst of a sea change.
If you look at a multi-decade chart, the Rupee has certainly lost most of its value relative to other currencies (USD, Euro, etc). That's primarily because India's inflation over the decades has been higher than that of western countries + India's trade deficit.
All this is changing. Surprising many investors, the Rupee was quite flat from October 2022-August 2024. The Reserve Bank of India is controlling the exchange rate by buying and selling in the forex markets. All this costs $$. As India's exports grow (services + goods exports), India's forex reserves will swell, just as China's did in the 1990s and 2000s. As India's forex reserves swell, the RBI has more firepower to control the exchange rate and keep the rupee stable, which anyways is a necessity since India wants to become an export powerhouse and replace China. (A stable currency helps Indian manufacturers buy raw components and sell finished goods).
Now of course we've seen a recent bout of rupee weakness. For the time being, the RBI's firepower is limited. It could have kept the exchange rate flat over the past 6 months, but that would have cost hundreds of billions $$ more. India's forex reserves went down from I believe $700 billion to $630 billion during the recent USD rally. But the moment the USD stops rallying, you can expect India's forex reserves to rise again.
Long story short, historically rupee depreciation was a major concern. Priced in USD terms, the Indian stock market went nowhere in the 2010s. But I believe that is a thing of the past; as India's exports grow, the RBI's ability to keep the currency stable grows.
Jai hind.