The exchange rate wavered between Rs44 and Rs50 for the next two years, but the US dollar began a rapid rise in mid-2011. Not only does India face rising government deficits, but investors have grown wary of emerging markets, commonly referred to as BRIC countries (Brazil, Russia, India and China) in the context of US economic recovery. In May 2013, the US Federal Reserve announced that it planned to reduce its purchases of foreign bonds, a policy which had helped to preserve economies around the world during the worst of the economic downturn. Although this never materialised, the news alone caused investors to withdraw capital from a number of emerging economies, including India, Turkey, Brazil, South Africa and Indonesia. Investors worried that these markets would crumble without an influx of capital from the US; once considered the engines of economic growth during the global downturn, these countries were then dubbed the “Fragile Five.”
From a trough of Rs44.4 in July 2011, the USD shot up to a record high of RS63.64 by September 2013, at the height of concerns over emerging market stability. Between late 2013 and mid-2014, the USD lost some value, bolstered by the continuation of the Fed’s stimulus programme and anticipated economic reforms from India’s newly elected government.
The dollar has recovered strength in late 2014 and early 2015, on the back of economic growth and improved employment data. The USD gained value against all major currencies by 2014 year-end, for the first time since 2000. The USD to INR exchange rate rose again to a near-peak level of Rs62.1 in January 2015, and the dollar’s rise is expected to continue through the year, which does not bode well for India’s beleaguered economy and exchange rate.