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.
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