A couple of days ago, the rupee rose to 71 paise to 80.69 against the US dollar. Last year, it was around Rs 74 against the US dollar. In October, the rupee hit a record low of 83.08. It is expected to reach Rs 84 or even more by the end of this year.
Earlier, the barter system was utilized to exchange goods for other goods in return. Later on, commodity money was initiated and its value was determined according to the metal it was made of. Commodity money was again replaced by representative money. Then finally came the fiat money. It was proposed in China around 1000 AD.
Interest rates control the amount of money that is in circulation. Whenever a bank raises interest rates, people rush to banks to invest so that they can get maximum returns. It also declines the currency supply against the demand. And, when demand exceeds supply, the value of the currency escalates. For India, which pays for foreign trade in US dollars, it becomes difficult when the country faces a shorfall in currency. The country requires to pay more in rupees for trading when there is a shortage of US dollars.
Investors always look for countries that have stable governments. And the US being one of the most stable governments in terms of economic, political and social measurements, investors consider the US dollar as a safe haven.