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Let me explain it step wise: 1. Imagine an X- shaped diagram in front of your eyes. Now place this within X and Y axis with X axis being INR and Y axis being USD. Now imagine first arm of the X- diagram, the arm that goes (\) ie topleft to bottom right: this is the Supply curve of USD vs INR. The other arm that goes (/) ie topright to bottom left: this is the demand curve of USD vs INR. The point where both the arms cross is the equilibrium point (E). This is the current exchange rate ie 1 USD =x INR. 2. Now, if Forex Reserve increases (inflates) the supply arm of the (X curve) shifts upward ie more toward the Y-axis. The demand curve remains constant. Hence the point where the 2 arms interesect, the equilibrium:E, have shifted. This new E, would mean less INR for more USD. 3. Hence the appreciation of INR in effect, as the forex reserve increases (i), the supply of USD in the local Indian market (i), hence there are fewer INR chasing the USD, which indicates a supply glut of USD and hence drop in the exchange rate that USD can command , hence the rupee appreciation.
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Where can I get information regarding forex exchange?
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