8. Appreciation of Indian rupees will occur when Rs. 75 have to be paid to exchange one
US$ instead of present rate of Rs. 70 per US$.
1
Answers
Explanation:
Rupee Devaluation or Depreciation: How does it affect Export and Import?
FILED UNDER: CURRENT AFFAIRS NOTES, ECONOMICS NOTES
Rupee Devaluation or Rupee DepreciationYou might have seen news headlines like “Indian rupee falling” or “Rupee falls to Rs.70 against US dollar”. Have you ever wondered why rupee is falling? Who fixes the value of the Indian rupee as Rs.70 per 1 US dollar?
Let’s us discuss in this post a few confusing concepts in economics related to the currency market. We shall see in this article, the difference between Rupee Devaluation and Rupee Depreciation.
Let’s also trace the value of Indian rupee with respect to US dollar from 1947 and see how a fall in rupee value affects exports and imports.
Who fixes the value of Indian Rupee against US dollar?
Interesting question. Do you think the Indian government fixes the value of Indian Rupee against US dollar?
If not, who fixes it?
RBI?
No.
At present, none of these entities fixes the value of Indian Rupee. Now the value of Indian Rupee (or any other currency) is determined by the market.
Yes, Market!
Here market means the currency market.
The demand and supply forces in the currency market determine the price of each currency.
If the demand for Indian currency is high, Indian rupee will appreciate (for example 1$ = Rs.40), and if demand is low, it will depreciate (for example, 1$ = Rs.70).
If market forces determine the value of a currency, that type of system is called Floating Rate System. India has adopted the partial floating rate system since 1975, and from 1993 is fully dependent on Floating Rate System.
This means that our Prime Minister, Finance Minister or RBI chairperson cannot fix the currency exchange rate at the click of a button. But they still have some control – through policy measures or by controlling foreign exchange reserves.
Fixed Rate System vs Floating Rate System
If the government or RBI fix the exchange rate of a currency (and does not allow any variations according to demand and supply forces in the market), such a system is called the Fixed Rate system. It is also called the Bretton Woods system or Pegged Currency System.
India was following this kind of system till 1975 and partial controls followed until 1993. Since this currency valuation mechanism is artificial, most of the countries including India changed to Floating Rate System where currency market determines the value of a currency.
Rupee Devaluation vs Rupee Depreciation
The term devaluation is used when the government reduces the value of a currency under Fixed-Rate System. When the value of the currency falls under the Floating Rate System, it is called depreciation.
Revaluation is a term which is used when there is a rise in currency value in relation with a foreign currency in a fixed exchange rate. In the floating exchange rate regime, the correct term would be appreciation.