When we hear about some purchases made by different countries, they do it in DOLLARS. It is because it is denoted as the globally accepted currency throughout the world. For international transactions, many countries use the US dollar. So, in this article, we will learn how US currency became an international mode of transaction, how Indian rupee raises and falls down.
Us Dollar: Global Currency:
During world war II, many countries were in need of weapons. The US had adequate weapons and as there was no standard currency for all the countries in those days, those countries gave Gold and in return, the US gave them weapons. So, as the war ended, the US has a vast amount of gold reserves in the world. After a few years as other countries had limited gold reserves, they asked the US to return them those and offer something that the US demanded.
Then came the Breton Woods Agreement, approximately delegates from 44 countries signed a treaty with the US that in order to return the gold reserves, the countries have to pay them in US dollars which indirectly states that the US dollar equals to the value of gold. Today, more than 61% of all foreign bank reserves are denominated in U.S. dollars, according to the International Monetary Fund. Many of the reserves are in cash or U.S bonds such as U.S. Treasuries. Also, approximately 40% of the world’s debt is denominated in dollars.
So, from the above explanation, one can understand why the US dollar is considered as the Global currency. Now, we will know how the value of Indian currency changes with respect to the US dollar in a simple way.
Raise and Fall of Indian Rupee:
We usually come across news channels stating that the Rupee value is stable, the value of rupee reached an all-time low or all-time high. But, have you ever got a doubt how does this happen? Let me tell you how.
Suppose, a country like the USA has established some companies in India. Then they have to invest dollars in our country. So, the USA is losing some dollars for India thus the value of Indian rupee increases. But, this does not happen very frequently, India is still a developing nation as we have less foreign investments. We import goods from other countries and for that, we have to pay in dollars which indirectly means that rupee should be converted into the dollar and so, we are losing money and the others are gaining US dollars. In these circumstances, it leads to the fall of rupee value.
But, RBI has some techniques to stabilize the rupee value during its downfall. As said above, if the rupee value falls down, that means we are losing some Indian money. For example, India has 100 dollars and we have to give 90 dollars in return to the US for the goods that we have purchased. Then India will only have 10 dollars which lower the value of the rupee. At this time, the RBI gives 90 dollars from its foreign exchange reserves and now India will again have 100 dollars so, the value of rupee will be stable.
The foreign reserves include gold, International Monetary funds, security bonds, etc.