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Friday, 4 October 2013

How the value of rupee depends on dollar?

The value of a currency depends on factors like
1. Imports and exports
2. Inflation
3. Employment
4. Interest Rates
5. Growth rate
6. Trade deficit
7. Performance of equity markets
8. Foreign exchanges reserves
9. Macro economic policies
10.Foreign investment inflows
11.Banking capital
12.Commodity prices and geopolitical conditions.
We discuss detailed about these factors how they influence the currency.

Imports and exports:
A country that sells(export) more goods and services in overseas market means more foreign currency comes into the country.At the same time the country which buys(import) more from other country means it has to pay in the form of foreign currency.
The country which exports more than what it imports from other country has a trade surplus.It means more foreign currency comes into the country than what is paid for imports.This strengthens the local currency.

Inflation and growth rate:
The difference between the money flow in the economy and the economic growth is called the inflation.
If the growth in money supply is more than the economic growth then the inflation will move very quickly.If the growth of money supply lags economic growth then the economy will face deflation(negative inflation).
Prices increases means the value of the currency has gradually decreased and the purchasing power of people will fall.This inflation deduces consumption then the industries will get hurt.Imports also become costlier, but exports earn more in terms of local currency.

Income level of the people influences the currencies through consumer spending.When income increases people spend more.Demand for household products increases the production of industries.If the demand for imported products increases the demand for foreign currencies and this will weakens the local currency. 

Interest rates:
The difference in interest rates between countries also influence the currencies.RBI manages the value of rupee with several tools like controlling its supply in the market and thus making it cheap or expensive,changes in interest rates,relaxation or lightening of rules for fund flows,tweaking the cash reserve ratio(CRR),Selling or buying dollars in the open market and also fixes the statutory liquidity ratio(SLR).

Trade deficit:
Trade balance means the net inflow and outflow of money and the flow of capital also affects the value of a country's currency.

Foreign exchange reserves:
Today international trade and movement of people increasing rapidly, there is no currency that is acceptable across the globe.Whether you go for higher studies to the US for vacation,you have to pay for services and goods in the currency that is accepted in that country.Even while shopping online on stores run by foreign companies, you have to pay in foreign exchange.
The foreign exchange rate for conversion of currencies depends on the market scenario and the exchange rate being followed by the countries.Most countries adopt a mixed system of exchange rates where reserve banks intervene int he market to buy or sell the different currencies to control the movement of their own currencies.