Question

recenty, the rate of dollars has shot up and the Indian rupee has become very
weak against dollars. What does this indicate? Use a numerical example. Also
explain its effect on the economy and
the RBI control this situation? (Use diagram)
the economy and balance of trade of the country.​

Answer 1

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When, the rate of dollar shots up and the Indian rupee becomes very weak against dollars ( Currency devaluation ), this indicates that the value of Indian rupee against the dollars has decreased.

Recently in March 2020, the value of $1 in Indian rupees is 73.93 Indian rupees.

Sometimes, the rate of the Dollar rises upto 76 or 77 rupees, which indicates that the value of Indian rupee has risen a bit.

But, sometimes it decreases to rupees 65 also, this indicates that the value of Indian rupees against dollars have decreased.

Well, the currency devaluation ( decrease in the value of currency ) all the currency revaluation ( increase in the value of currency ), does not actually affect the economy of a country ( India ), but it obviously affects the value of a good.

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Let's take an example to understand this in a better manner:-

Let's assume that 1 USD = 10 INR.

Here, USD is United States dollar and INR is Indian rupees.

Now, we can buy a chocolate in 1 $. The people in let's say United States, can buy it only in 1 dollar. But, Indians would have to buy it in 10 rupees.

Now, say that the value of Indian rupees revaluates, say it becomes 1 USD = 5 INR or 2 USD = 10 INR, and the value of the chocolate remains same that is 1 $ , a person in India would have to pay only 5 rupees instead of 10 rupees.

Now, if the value of Indian rupees devalutes, say it becomes 1 USD = 15 INR, and the value of the chocolate remains $1, a person India would have to pay 15 rupees for it instead of 10 rupees.

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As, I said before, it affects the economy of the country very less, but when it affects it has a greater impact.

When the currency devaluates, the country's goods becomes expensive for the foreigners where as when the currency revaluates, the goods become cheap for the foreigners but expensive for domestic consumers/users.

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The RBI is the organisation in India which controls currency devaluation or revaluation.

The Reserve Bank of India intervene in such situations a lot. It may sometimes buy and sell dollars. The increase and decrease of the value of rupee can also be determined by intervening of The reserve Bank of India.

When the RBI wants to increase the value of Indian rupee, it sells dollar and when it wants to decrease the value of Indian rupee it buys dollar.

It can also control the the money by repo rate and liquidity rate. These can also be called as monetary policies.

The repo rate is the rate at which the money is provided to the banks. The liquidity rate is the rate at which the banks have to to invest in government bonds.

The main aim of reserve Bank of India is to keep an eye on the decreased value of Indian rupee that it does not increase the the import bill.

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The reserve Bank of India controls the economy of the country by increasing or decreasing the interest rate, controlling the flow of money outside the country and even inside the country, controlling repo rate, etc.

It also influences the budget of the country and by this it controls the economy of the country.

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The trade influences the GDP of the country. If in one country the imports are larger than the exports, the country will obviously have less GDP and economy whereas if a country has more exports than the imports, the country has good economy as well as GDP. The RBI can influence trade by changing the value of Indian rupees that is either increasing or decreasing the value.

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The reserve Bank of India also checks the work of the banks of the country. All the banks of the country submit the details of at what interest rate they have given loans and about what interest rate they are providing for the safety of the money to the depositors.

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The diagram to show Reserve Bank of India's influence and work is in the attachment.

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