Can ₹1 be equal to $1? If yes, how will it affect our lives? If the values of both these currencies are the same? It’s an interesting ongoing game with the US Dollar and Indian Rupee. There was a time when our politicians used to make promises about this.
Ever since our country became independent, the Rupee’s value has been deteriorating continuously. Why did it happen? And what will happen if ₹1 becomes equal to $1?
How Exchange rate works?
Let’s start with the absolute basics. The conversion rate between two currencies is known as the Exchange Rate. There are three types of Exchange Rates mainly.
- Fixed Exchange Rate.
- Floating Exchange Rate.
- Manage Exchange Rate.
- Fixed Exchange:
The fixed exchange rate means that the government controls the exchange rate or the conversion rate of the currency.
- Floating Exchange Rate: The floating exchangerate means that the exchange rate of the currency keeps on changing based on the supply and demand in the market.
Let’s see an example: Suppose you and I live alone on two islands. We grow different things on our island. You grow tomatoes on your island and I grow onions on mine.
Both of us create our currencies. You make Tomato coin your currency. You create 100 coins, so you have 100 Tomato coins. I make Onion coins my currency. And I have 100 Onion coins.
We decided that the conversion rate or the exchange rate of our currencies would be 1:1. So 100 Tomato coins should be equal to 100 Onion coins. A few months pass. You work very hard and you grow 200 tomatoes instead of 100.
But I didn’t work as hard and managed to grow only 100 onions. Suddenly, the value of your currency has increased because you still have only 100 Tomato coins. The money remained the same. So for you, the value of one coin has become 2 tomatoes. If you want to exchange it with me, the value of 1 Tomato coin has become equal to 2 Onion coins. Did you understand how it works?
Manage Exchange Rate: The third type of Exchange Rate is the Managed Exchange Rate. Some countries say that they will allow fluctuations in the value of their currencies based on the changing supply and demand in the market. But only to a limit. They’ll set a limit that the value of the currency cannot fluctuate more than, say, 5-10%.This is known as the Managed Exchange Rate.
In reality, there are many reasons for the fluctuations in the value of the currencies. Unemployment rates. Inflation rate. The GDP of a country. The manufacturing activities in a country. The types of products produced in a country.
How is the export and import of the country? All of these things affect the Currency Exchange Rate. It is interesting to know friends that most of the countries had Fixed Exchange Rates before the 1970s.
Devaluation of Currency
Let us understand the devaluation of the currency by example: Around the 1950s, the government spent a lot on the development of the country.
But it didn’t earn as much. So the government took several loans from other countries. And since the government didn’t have enough money to repay the loans the government devalued the rupee.
How does this work? Suppose I take a loan of ₹100 from you and spend all of it. I have ₹25 left with me only. So how will I repay the loan when I don’t have ₹100?
But remember this, I can control the Rupee. I can control the Value of the Rupee because I’m the Indian Government. So what I do is, I start printing more money. If I print more money, its supply will increase. and if the supply of the money increases the value of the currency will fall. I print so much money that ₹10 now has the same value ₹1 had then. It’s been devalued so much. So the ₹25 that I have become ₹250 overnight.
And then I repay ₹100 to you out of the ₹250. Effectively paying off the loan. This is how the devaluation of a currency works.
What happens if 1 Dollar = 1 Rupee?
Now, let’s talk about what would happen if ₹1 were equal to $1 now.
It can’t happen but let’s imagine a hypothetical situation. What would’ve happened if it were true? Firstly, it would’ve been very easy for you to vacation abroad. Whenever you go to Europe or the US for a vacation, you won’t have to spend a lot of money. Instead of Lakhs of rupees, it would’ve cost you in the thousand seven for luxurious vacations.
The luxury goods that you would’ve bought from other countries like an iPhone, iPhone would’ve cost you only ₹600. It would’ve been that cheap to buy an iPhone. And import prices would’ve been very cheap too. Petrol could’ve been purchased by the country for a fraction of the cost. Had you gone abroad to study, or sent your kids to another country to study our lives would have been so much better if ₹1 were equal to $1.
Everything would be cheaper. That would be a good thing, right?
But now comes the reality check. Friends, if ₹1 does become equal to $1,it would also mean that no foreign investment will come to India. Or a negligible amount of foreign investment might come in. Because foreign companies that want to invest in India, do so because they get cheap labor in India. It is much cheaper to employ people in India as compared to employing people in Western countries. So if the companies see that they need to pay $35,000 to employ an American and they will need to pay the same salary for employing an Indian what will be the incentive to invest in India? They’ll employ people from their own country. Or will go to another country where they could find cheap labor.