What if 1 Rupee is equal to 1 Dollar?
Every Indian, at some point or the other, has pondered over this question, “Why isn't 1 USD equal to 1 Rupee?” or “What if 1 USD was equivalent to 1 Rupee?” To begin with, let’s see why the discrepancy exists in the first place.
The Indian rupee sank to its lowest ever against the US dollar on March 7 as the war between Russia and Ukraine hiked crude prices to multi-year highs globally. The rupee fell to 76.9800 per dollar, against its previous low of 76.9200 to a dollar hit in 2020.
However, it is essential to understand that a high currency value does not necessarily warrant that the country's economy is flourishing. Bangladesh's economy would be stronger than Japan's if this were the case because 1 BDT equals 1.4 Yen.
The current value of one US dollar in Indian rupees fluctuates between 72 and 76. In 1947, however, 1 USD equaled 1 INR. Because of various factors, the INR's currency value is steadily declining. Let's look at a few of the reasons:
1. Depreciation of the rupee: Post-independence, the Indian government borrowed money from various nations and organizations for the development of the country. However, with the current currency rate, they could not repay the money. As a result, the Indian government depreciated the rupee.
2. Wars and conflicts: India sustained heavy losses in the conflicts with Pakistan and China, pushing it to seek loans from foreign nations. India was in desperate need of foreign capital at the moment. To entice them, the government altered the exchange rate once more.
3. Numerous political upheavals occurred in India during this time, including the assassination of Indira Gandhi, which caused foreign investors to lose faith in the country.
4. The 1991 Economic Crisis: The Indian government acknowledged the importance of liberalization in 1991. During this time, the rupee's value fluctuated due to variations in demand and supply. The government faced a balance of payment difficulty, which resulted in an economic downturn.
5. Global Economic Crisis: The Indian rupee reached a high of 39 to the dollar in 2007, but the global economic crisis weakened its value, causing it to fall to 51 in 2008.
6. Depreciation in 2013: The debt market exchange rate fell from 55.48/$ on May 22 to 57.07/$ within fifteen days due to a jump in dollar demand from imports and capital outflows by FIIs pulling out.
With all of these factors in mind, realistically speaking, it can be concluded that 1 INR will never equal 1 USD. Nonetheless, if we were to hypothetically imagine a world where 1 Dollar is equal to 1 Rupee, these would be both positive and negative consequences:
There are many pros to this situation, but they would be temporary and short-lived:
1. Purchasing goods in the international market will be less expensive for Indians because this will lower the cost of imports, which is beneficial to a developing economy.
2. Purchasing high-end or luxurious items will become more affordable. An iPhone, for example, will cost INR 650, which is less than the current market rate.
3. As import prices fall, so will petrol rates, resulting in lower transportation costs for commodities throughout the country.
4. Travelling to another nation will be less expensive: Now, if someone wants to travel on a foreign holiday, they must consider their budget, which is relatively high. Traveling will be cheaper if the value of 1 INR is equivalent to 1 USD.
5. Brain Drain will be halted or reduced — If a job in another nation pays the same as a job here, people will not choose to work there.
6. The expenses of international shipping and logistics will be minimized.
Primarily, just by making an exit at the right time you can avoid the tax burden. So, be a smart investor, and use Tax Harvesting method, as proposed in Case A, to save taxes on LTCG.
The cons are far more severe and impactful than the pros:
1. Imports will become less expensive since we have to pay a nominal fee to import items. It will put the home industry in jeopardy. However, this may not persist for long because exporters to our nation may boost prices after a while. Even still, local manufacturing will face stiff competition from foreign-made items.
2. Exports will not bring in a lot of money. This will have a detrimental impact on the economy. If exporters raise prices, our goods will not be able to compete with those of other nations. As a result, many people working in the export business would lose their employment.
3. People will prefer to invest in other nations where they can pay less for resources such as land, human resources, and so on. Hence foreign direct investments would plummet. This significantly impacts the IT sector, as many international corporations outsource IT work to Indian firms. They would start outsourcing them to other nations where they may pay less if the rupee becomes equivalent to the dollar. Many jobs will be lost as a result of this.
4. Because the currency's value rises, wages and prices will eventually fall.
5. When money does not flow into India, the economy will stutter to a halt.
6. Companies that are now based in India will begin to leave since the country would no longer be profitable for them. In India, a similar situation occurred in 2007-08, when the rupee was strong at Rs.40 and imports were robust. However, the BPO and IT industries were severely impacted.
7. Effect on banks: If employees are paid less, they will fail to pay their EMIs, resulting in unpaid loans and an increase in debts. This will have a negative impact on banks, leading to a rise in nonperforming assets (NPAs).
For a developing or rising country, the condition of 1 Rupee = 1 USD is just unsustainable. India is still a developing country, and as such, 'Foreign Investment' is critical to the country's development. Most international investors invest in India because the Indian Rupee is undervalued, allowing them to afford low-cost labour. India needs to export commodities to bring in more revenue.
In 2015, China depreciated its currency to increase exports. Because we buy more items than we export, currency appreciation should ideally benefit India. In practice, however, this will not be the case. Consequently, the economy will suffer due to the abrupt increase in currency value. In some cases, however, when the value of a currency rises slowly and continuously, it is a good indication since it indicates that demand for that money is increasing.