eli5 :Why did the rupee kept falling against dollar from 2007-09 despite the American recession and India’s growth in GDP?

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eli5 :Why did the rupee kept falling against dollar from 2007-09 despite the American recession and India’s growth in GDP?

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In times of global economic uncertainty, there is a tendency for investors to pull their money to safer investments a so called “flight to safety”. Because the USD is the global reserve currency, this typically means money leaving more (perceived) risky currencies to the USD – meaning demand for USD tends to increase relative to other currencies.

India runs a negative balance of trade and that also tends to put a downward pressure on their currency.

Exchange rates are not always related to GDP growth so the correlation is not very strong. The central bank plays a large role in this. In this case the Central Bank of India.

During the Great Recession, the foreign direct investment in India reversed course, as the large economies of the world were in recession. The 2008 financial crisis was not just an American event, as almost all of the European economies also contracted as a result. While India’s GDP continued to grow, the foreign direct investment dried up, leading to less demand for rupees overall. The dollar in the meantime experienced strong demand as large institutional investors jumped from high risk assets into the safety of US treasury bonds. This supply/demand reshuffling is what contributed to the lower value of the rupee relative to the US dollar during the Great recession.