foreign exchange and diminishing value of indian rupee

7/30/2019 Foreign Exchange and Diminishing Value of Indian Rupee

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FIXED EXCHANGE RATE SYSTEM

Rate is officially fixed by government or monetary authority.Not determined by market forces of demand and supply.

FLEXIBLE EXCHANGE RATE SYSTEM

No official intervention in foreign exchange market.Rate is determined by the forces of demand and supply.

The rate at which currency of one country can be exchanged for the currency ofanother country is called foreign exchange.

FOREIGN EXCHANGE.

::TYPES::


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DETERMINATION OF FOREIGN EXCHANGE RATE

Exchange rate is determined at a point where demand of foreign exchange

is equal to its supply. Demand curve (DD) is downward sloping showing less foreign exchange is demandewhen exchange rate increases. ( Inverse relationship).

Supply curve (SS) is upward sloping showing supply of foreign exchange increaseswhen exchange rate increases. ( Direct relationship)

E is the equilibrium point where demandcurve and supply curve intersect eachother.

OR is the equilibrium quantity demanded.OQ is the equilibrium quantity supplied.


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WHEN DO WE DEMAND FOREIGN EXCHANGE ???

To purchase goods and services from foreign countries.

To invest directly in shops, building, factories in foreign countries. To send gifts and grants to abroad. To make payments of international trade.

WHEN DO WE SUPPLY FOREIGNEXCHANGE ???

When foreigners purchase goods and services from our home country viaexports.

When foreigners invest in bonds and equity shares of the home country.When Indian living abroad send gifts and grants to their family inIndia.


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Why there are fluctuations in exchange rate ????A market based exchange rate will change whenever the values of either of thetwo component currencies change. A currency will tend to become morevaluable whenever demand for it is greater than the available supply. It will

become less valuable whenever demand is less than available supply. Theexchange rate between currencies fluctuates because of the economic principleof supply and demand. Also, the demand of a particular currency is in partbased on the speculations of foreign exchange traders as they make guessesabout the futures of particular currencies. As foreign exchange speculatorschange their views about the future, their demand for currency changes,

resulting in exchange-rate fluctuations.

Appreciation & Depreciation ofcurrency:A currency appreciates means its value has increased in relation toanother currency. A currency depreciates means its value has decreased

in relation to another currency. E.g. If 1 $ costs Rs 45 and if it now costsRs 44, this means rupee has appreciated in its value (i.e. instead of Rs45 you will get 1 $ in Rs 44, this also means the dollar has weakened).Similarly, if 1 $ costs Rs 45 and if it now costs Rs 46, this means rupeehas depreciated in its value (i.e. instead of Rs 45 you will get 1 $ in Rs46, this also means the dollar has strengthened).


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44

46

48

50

52

54

56

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JAN FEB MAR APR MAY JUN JLY AUG SEPT

Exchange

Rates

USD VS INR

INR


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InflationA country with a consistently lower inflation rate exhibits a rising currencyvalue, as its purchasing power increases relative to other currencies.

Interest RatesA higher interest rates offer good returns compare to other countries. Itwill result in the foreign capital come into the country. Lower interest ratesdecrease the currency value.

Current Account Deficitscurrent account of a country presents the status on the trade of a countrybetween other trading partners. If there is any deficit in the currentaccount, that means country is doing more trading outside the countrythen its actual earning inside the country.

FACTORS INFUENCING THE

CURRENCY VALUE


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REASONS FOR DEPRECIATION OF

INDIAN RUPEE !!!

Shortage of dollar.

More demand

Less supply

Recession in U.S.

Investors pooling money back.

Collapse of international trade.

Commodity prices crashing at intl. level.

Importers try to accumulate dollars as they will have to pay in terms of dollars. Global recession.

Exporters got less order from outside country.


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High deficits. Government spending a worthy amount as subsidies.

Result in widening the deficit gap.

weakness in local economy.

Repel foreign investors

Political Uncertainty and Corruption. last one year - series of corruptions.

No good news from the ruling party (Congress).

Agitation among the citizens.

Needs political change to gain confidence among the investors.


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Exporters are perhaps the biggest beneficiaries of the Rupee depreciation as every dollar of

their sale fetches them more Rupees. Hence if they dont reduce their prices, with the same

quantity of sales, they earn more in terms of Indian Rupees.

NRIS are the persons who live in India but get their salary in dollars. Due to depreciated

value of rupee, they are able to fetch more money. Hence it gives NRIs a big incentive to

remit more funds into India for investment purposes, adding to Indias forex reserves.

With a depreciated value of rupee, holidays in India become cheaper. This promotesforeigners to visit India as India becomes an attractive Tourism spot owing to itsfinancial competitiveness.


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Due to depreciated value of Rupee ,every dollar which we have to payfor our imports, costs more.

The cost of borrowing become more expensive than what it would have

when borrowed within India. Not that the interest rates on externalborrowings went up, but the impact of currency depreciation meant thatthe borrowing companies had to pay more Rupees to repay their dollardenominated loan.


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Increase the supply of foreign exchange.

strengthen direct foreign investment for infra structural development.

open the door of the market partially to the world.

Save per capita cost.

Agriculture system should be make better.

Production should be increased

The Reserve Bank of India had taken certain initiatives to arrest rupee's fall.

Raising the NRI deposit interest rates.

Easing availability of export credit.


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SAMYAK JAIN SUBHAMDEEP KUMAR


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foreign exchange and diminishing value of indian rupee

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