FOREIGN EXCHANGE.

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

::TYPES::
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.

DETERMINATION OF FOREIGN EXCHANGE RATE

E is the equilibrium point where demand curve and supply curve intersect each other. OR is the equilibrium quantity demanded. OQ is the equilibrium quantity supplied.

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

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 FOREIGN EXCHANGE ???

When foreigners purchase goods and services from our home country via exports. When foreigners invest in bonds and equity shares of the home country. When Indian living abroad send gifts and grants to their family in India.

Why there are fluctuations in exchange rate ????

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply. The exchange rate between currencies fluctuates because of the economic principle of supply and demand. Also, the demand of a particular currency is in part based on the speculations of foreign exchange traders as they make guesses about the futures of particular currencies. As foreign exchange speculators change their views about the future, their demand for currency changes, resulting in exchange-rate fluctuations.

Appreciation & Depreciation of

currency:
A currency appreciates means its value has increased in relation to another 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 costs Rs 44, this means rupee has appreciated in its value (i.e. instead of Rs 45 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 rupee has depreciated in its value (i.e. instead of Rs 45 you will get 1 $ in Rs 46, this also means the dollar has strengthened).

USD VS INR
58

56

Exchange Rates

54 52 50 48 INR

46
44 JAN FEB MAR APR MAY JUN JLY AUG SEPT

FACTORS INFUENCING THE CURRENCY VALUE

Inflation A country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.
Interest Rates A higher interest rates offer good returns compare to other countries. It will result in the foreign capital come into the country. Lower interest rates decrease the currency value. Current Account Deficits current account of a country presents the status on the trade of a country between other trading partners. If there is any deficit in the current account, that means country is doing more trading outside the country then its actual earning inside the country.

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.

 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.

POSITIVE IMPACTS
FOR EXPORTERS 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.
FOR NRIS 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. FOR TOURISM With a depreciated value of rupee, holidays in India become cheaper. This promotes foreigners to visit India as India becomes an attractive Tourism spot owing to its financial competitiveness.

NEGATIVE IMPACTS
EXPENSIVE IMPORTS Due to depreciated value of Rupee ,every dollar which we have to pay for our imports, costs more. REPAYMENT OF LOAN The cost of borrowing become more expensive than what it would have when borrowed within India. Not that the interest rates on external borrowings went up, but the impact of currency depreciation meant that the borrowing companies had to pay more Rupees to repay their dollar denominated loan.

 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.

SAMYAK JAIN

SUBHAMDEEP KUMAR