Why is the value of Indian rupee calculated against the US Dollar?

Asked 01-Jan-2018
Updated 01-Sep-2023
Viewed 472 times

0

Why is the value of Indian rupee calculated against the US Dollar?


1 Answer


0

The value of the Indian Rupee (INR) is calculated against the US Dollar (USD) primarily for several historical, economic, and practical reasons.

1. Global Reserve Currency: The US Dollar is widely regarded as the world's primary reserve currency. Many countries hold significant reserves of US Dollars because of its stability and widespread acceptance in international trade. As a result, it serves as a benchmark for currency valuation worldwide.

2. Historical Precedence: After World War II, the Bretton Woods Agreement established a fixed exchange rate system, with most major currencies pegged to the US Dollar. Although this system collapsed in the early 1970s, the practice of valuing currencies against the USD continued due to its historical prominence.

3. Global Trade: The US is one of the largest economies in the world, and many nations engage in trade and financial transactions with the US. Using the USD as a reference currency simplifies international trade, making it more efficient and transparent.

4. Financial Markets: The USD is a dominant currency in global financial markets. Many commodities, including oil and gold, are priced and traded in USD. Additionally, major international financial institutions and central banks use the USD as a benchmark for various financial instruments.

5. Currency Exchange Rates: Currencies are valued in pairs in the foreign exchange (Forex) market. The USD is often used as one of the currency pairs in Forex trading. It serves as a baseline for currency exchange rate comparisons, allowing traders and investors to make informed decisions.

6. Economic Stability: The US economy has historically exhibited relative stability, making the USD a reliable reference point for assessing the value of other currencies. Comparing the INR to the USD provides insights into the relative strength and stability of the Indian economy.

7. Investor Confidence: Many investors and businesses around the world use the USD as a safe haven currency due to its stability. When assessing investments or business transactions involving India, the USD provides a common reference point for evaluating risks and returns.

In summary, the value of the Indian Rupee is calculated against the US Dollar because the USD holds a central position in the global economy, trade, and financial markets. This practice simplifies international transactions, facilitates economic comparisons, and provides a reliable benchmark for assessing currency values and economic stability.