Let us assume that 1 $ becomes equal to 1 ₹ overnight without a radical change in productivity or a massive drop in real salary.
A good Indian engineer makes Rs. 75,000 per month. Skills wise, he might be comparable to some one making $3000 in the US.
What if 1 USD becomes 1 INR and this engineer's productivity and salary stays the same?
The Indian engineer's salary becomes equal to $ 75,000. Now he is happy with his salary and go on to buy hot gadgets from the Apple store, a few things change.
But the question rises:
Why would a company pay him $ 75,000 when you can get someone for $3000 in the US?
Answer is: Of course, they would not.
So, every employed Indian - be it engineers, doctors, teachers, designers, accountants - would be throw out from their jobs and the jobs would move out of the country as workers are cheaper outside India.
For the jobs that can not be moved outside India, such as cleaning, house keeping etc., the employer would find some technological solutions. A good robotic vacuum cleaner worth $2000 would be used rather than the $5000 per month human cleaner.
As people get removed from the jobs, they will not have enough money to spend. So, plenty of other jobs that rely on them (Shops, restaurants, hotels, cafes, airlines, tourism, ...) will be broken.
As people get fired, they will be ready to work for lower and lower salaries, until their salary drops below the international level.
Since 1 USD = 1 INR, that would make great engineers make Rs.3000 per month. How would he pay his EMI on homes, cars and gadgets? They cannot and they would default.
The banks would have huge unpaid loans and they will go bankrupt. Investors would exit and government would have print a lot of notes (money) to keep the banks alive.
That would increase the inflation and push down the rupee so much that things get back Rs. 60 = 1 USD.
At that point, the Indian's wage will be so low that jobs will move back again and the cycle would continue.
Finally, the strength of any currency depends on following two things:
A good Indian engineer makes Rs. 75,000 per month. Skills wise, he might be comparable to some one making $3000 in the US.
What if 1 USD becomes 1 INR and this engineer's productivity and salary stays the same?
The Indian engineer's salary becomes equal to $ 75,000. Now he is happy with his salary and go on to buy hot gadgets from the Apple store, a few things change.
But the question rises:
Why would a company pay him $ 75,000 when you can get someone for $3000 in the US?
Answer is: Of course, they would not.
So, every employed Indian - be it engineers, doctors, teachers, designers, accountants - would be throw out from their jobs and the jobs would move out of the country as workers are cheaper outside India.
For the jobs that can not be moved outside India, such as cleaning, house keeping etc., the employer would find some technological solutions. A good robotic vacuum cleaner worth $2000 would be used rather than the $5000 per month human cleaner.
As people get removed from the jobs, they will not have enough money to spend. So, plenty of other jobs that rely on them (Shops, restaurants, hotels, cafes, airlines, tourism, ...) will be broken.
As people get fired, they will be ready to work for lower and lower salaries, until their salary drops below the international level.
Since 1 USD = 1 INR, that would make great engineers make Rs.3000 per month. How would he pay his EMI on homes, cars and gadgets? They cannot and they would default.
The banks would have huge unpaid loans and they will go bankrupt. Investors would exit and government would have print a lot of notes (money) to keep the banks alive.
That would increase the inflation and push down the rupee so much that things get back Rs. 60 = 1 USD.
At that point, the Indian's wage will be so low that jobs will move back again and the cycle would continue.
This is the reason why Reserve Bank of India (RBI) is attentive not to let Indian rupee too strong. It is to India's benefit that $1 equal Rs.60. It helps keep salaries high, exports high and imports low.
Finally, the strength of any currency depends on following two things:
- Productivity of the people: If every Indian making Rs.75000 per month is able to produce 25 times more output than a US citizen making $3000, then only India can enjoy $1 = Rs.1.
- Inflation. If a country goes through a sustained low inflation rate with respect to other countries, its currency would move up. That means after some years, if your salaries stays the same at Rs.75000 per month while America's inflation takes an average guy's salary to $75000, then $1 = Rs. 1
