What are the Effects of appreciation or depreciation of Indian rupee with respect to us dollar?

Answer 1

Before I answer the question, let me provide a simple example relating to exchange rate. For example, if 1 Indian Rupee equals to 2 US Dollars today, after the appreciation of the Indian Rupee it will equal to 5 US Dollars. ( please understand that I do not know the exchange rate betwen dollars and Indian Rupee, hence this example could look weird ). The appreciation means that the Indian Rupee can purchase more US dollars. If this happens, you can look at it from the perspective of the buyer and the seller. If you are a buyer from US and would like to buy things in India, the appreciation will be disadvantages to you, as you need to use more US dollars to buy things from India. If it is disadvantage to a buyer from US, it means a seller from India will be at a disadvantage, as the price of goods sold to foreigners are now more expensive. Hence the first conclusion can be drawn, it will be bad for sellers in India and bad for buyers in US. On the other hand, an appreciation, means that more US dollars can be exchanged with the Indian Rupee. This can be good for buyers in India, as now they have more buying power. If this happens, then it will be good for sellers in US. Hence, the second conclusion can be drawn, it will be good for buyers in India and good for sellers in US. It's important to understand that the above explanation is rather theoretical. In real life we can argue, the economy consists of both buyer and seller, and there will be a shift in advantages or disadvantages when the exchange rate changes. When we consider buyers and seller, you can expand your thinking and relate to students, tourists and workers. Students coming to study in your country, or tourists visitng your country can also be affected. ( use the same analysis on buyer and seller above ). Another important thing is to consider the economy at hand. And changes in the exchange rate will also depend on the economy and its development. Exchange rates are a huge topic in some Economics topic, and a major topic in International Finance. (cheong@bgymail.gd.cn)

Answer 2

rupee has appreciated by almost 8%

during March to May 2007. Appreciation was

much higher against US Dollar compared to Euro.

Another round of appreciation is visible between

August-October 2007, which has been relatively

mild. Import: When you import (buy from foreign markets) goods, you have to pay in dollars. India's chief import is crude oil. Suppose a barrel of oil costs $100, as per earlier rates a company would have to pay aout 4800 rupees($1=48 Rs) to buy a barrel, now can buy the same for 4000 Rs ($1=40 Rs.). so oil companies are the biggest gainers from the appreciating rupee. They are now getting oil at reduced prices but selling them to the customers at old rates, hence increasing their profits.

Export: When you sell goods/services in foreign market you get payed in dollars. A lot of companies that have been asking the govt. and RBI for control of the appreciating rupee, are export driven companies like big IT cos. who export software solutions and provide out-sourcing services. There are many others too like garment exporters and even automotive companies. the scene here is that, supposing a BPO company charged $100 for its services, it would be getting payed an equavalent amount to Rs 4800 as per old exchange rates, but because of the appreciating rupee, it now gets payed Rs 4000, and as the market gets increasingly competative the company cannot increase the fee it charges the client to $120 to cover this loss, as it risks losing the client to some other company. Garment exporters are hit even stronger as they mostly survive on large dedicated orders and charging more to cover their losses can even result in cancellation of large orders and massive loss to a garment exporter.

Answer 3

Appreciation and depreciation of currency

As per my post on basics of appreciation and depreciation of rupee, we saw what appreciation and depreciation of rupee means. Now this post will help us to understand what causes appreciation and depreciation of a currency and its effects.

As from our previous example, we assume that there are 2 countries India and USA, and there is flexible exchange rate regime. Therefore value of currency of each country in terms of the other depends on the demand and supply of their currencies. It is in the foreign exchange market that exchange rate among different countries is determined. It is a market in which currencies of various countries are converted into each other or exchanged for each other. In our case, Indians sell rupees to buy US dollar and the Americans will sell dollars in exchange for rupees.

Demand for dollar
Now demand for dollar by Indians arises due to the following:
· The Indian individuals, firms or government who import goods from USA into India, as they need to pay for goods and services imported.
· The Indian individuals travelling and studying in USA would require to meet their travel expenses and education expenses.
· The Indians who want to invest in equity shares and bonds of the US companies and other financial instruments.
· The Indian firms who want to invest directly in building factories, sales facilities, shops in USA.

Supply of dollar
Let’s see what causes supply of dollars in exchange market:
· The individual firms and government which export Indian goods to USA will earn dollar from American residents who would buy Indian goods imported into USA and pay their price in dollar.
· Americans who travel to India and use the services of Indian transport, hotels etc .will also supply dollars to be converted into rupees for meeting these expenses.
· American firms and individuals who want to buy assests in India , such as bonds and equity shares of Indian companies or wish to make loans to Indian individual and firms will also supply dollars.
Equilibrium is establish in foreign exchange markets by simple demand and supply of currencies…..when
Demand= supply, then foreign exchange market is said to be in equilibrium. The equilibrium in the foreign exchange market will be disturbed if some changes occur in the underlying factors that determine the demand for and supply of foreign exchange.


Appreciation of rupee
For e.g., if there is in increase in incomes of American people due to boom conditions in the US economy, it will affect the equilibrium rate of exchange. The increase in incomes of the people of USA will lead to increase in demand for imported goods those of India. Now this would lead to increase in supply of dollars, which would in turn lower the price of dollars in the foreign exchange market by simple theory of demand and supply, as now there will be excess supply of dollars. This implies that increase in imports by USA from India leading to more exports from India will cause dollar to depreciate and Indian rupee to appreciate.

Depreciation of rupee
On the other hand if due to increase in incomes of Indian people causing arise in demand for American consumer goods or there is picking up of industrial activity in India requiring more imports of material, machines equipments and other capital goods from USA the Indian imports from USA will increase. The increase in imports from USA by India will have to be paid in dollars causing demand for dollars to increase. This will cause disequilibrium in the foreign exchange market, as with increase in demand for dollars, there will emerge excess demand for dollar which will push up the price of dollar and this rise in price of dollars in terms of rupees implies depreciation of value of rupee.

Answered By:-

SHAIKH ASHFAK

Technical Research Analyst

+91-9770850873

Answer 4

Change foreign investment policy