Dollar Value appreciation has not been a recent phenomenon. However, the recent appreciation in the value of the dollar has been a piece of breaking news because of several reasons.
- The huge jump in the value of the dollar was not expected.
- People expected that the Government or the Central Bank would do something to help the Rupee’s condition.
- Mechanisms implemented have not been fully successful to bring back the rupee to its previous level.
The fiscal or monetary policies implemented so far has worked well with the inflation targeting in India. However, more or less, the actions to check the fall of the rupees has not been very effective. People sending remittances to the home country, India, in US Dollars must be happy with such appreciation as the converted value would be high. However, it becomes a headache for people who travel outside India where they require US Dollars, as ultimately, they would have to burn more cash to get the same value of dollars.
Economists have been studying various phenomena to identify and implement models that could justify the fall or rise of the value of one currency with respect to the another. There have several economic models that have proposed so far. The models include the Purchasing Power Parity Theorywhich is based on the purchasing powers of the two countries, Interest Rate Parity Theory which is based on the interest rates of the two countries involved, International Fischer Effect which is based on nominal interest rates or inflation rates of the two countries, and Balance of Payments Theorywhich is based on the surplus or deficit of the account, i.e., in order to reach equilibrium, it must be balanced. There are few other theories which include Real Interest Differential Model, Asset Market Model, Monetary Model, and Economic Data model.
The focus of this paper is to discuss models that can provide quantitative methods to estimate future exchange rates. Accordingly, some of the models listed above have been discussed in the subsequent sections.