8 thoughts on “Indian Economy”

  1. The value of a currency depends on factors that affect the economy such as imports and exports, inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves etc.
    1. Trade
    A country that sells more goods and services in overseas markets than it buys from them has a trade surplus. This means more foreign currency comes into the country than what is paid for imports. This strengthens the local currency.
    2. Interest rate
    Another factor is the difference in interest rates between countries.
    By allowing banks to increase rates on NRI rupee accounts and bring them on a par with domestic term deposit rates, the central bank expects fund inflows from NRIs, triggering a rise in demand for rupees and an increase in the value of the local currency.
    3. Policy by central bank
    changes in cash reserve and statutory liquidity ratios increase or decrease the quantity of money available, impacting its value.

    4. purchasing power
    A fall in purchasing power due to inflation reduces consumption, hurting industries. Imports also become costlier. Exporters, of course, earn more in terms of local currency.

  2. Following factors influence value of indian currency in international market ( mainly dollar )

    1. How inflation rate of one country ( say, India ) affects exchange rate of another country (say, US ) ?
    Rising prices of goods and services in india will make them more expensive in comparison to USA goods resulting in rise in relatively cheaper imports from US into India hence resulting in appreciation of US Dollar & indian rupee to depreciate.

    2. How Capital inflows and outflows affect value of indian currency ?
    Inflows in form of FDI & FII’s etc into India will raise demand of indian Rupee ( dollars getting converted into Rupees ) hence causing rupee to appreciate & dollar to depreciate. Capital outflows from india to US will cause indian rupee to depreciate & dollar to strengthen

    3. Other factors like changing interest rates, political stability/instability and level of government debt determine investment sentiments into country and hence affect value of indian currency

  3. The value of the currency of India is determined by several factors as of today as compared to the Pre-1991 era. This is due to the fact that there was a fixed exchange rate prior to 1991 as opposed to a floating exchange rate in the present.

    Several factors contribute to it :

    1. Demand-Supply situation : The value of our currency in international markets as against a foreign currency depends on the demand of certain goods supplied by that nation in India. A higher demand will lead to the fall of Indian currency as compared to the foreign currency.

    2. Export-Import situation : An increase in the export of goods from India to a particular country would lead to an inflow of foreign exchange from that country leading to a strong domestic currency.

    3. Investment climate : An investment climate that is particularly favourable for a country or an economic union might lead to the inflow of the staple currency of that group into India reflecting investor confidence and strengthening domestic currency.

    4. Central Bank Interventions : Sometimes in order to combat inflation or the excess flow of foreign funds the Central bank undertakes sale/purchase of government securities. This leads to injection/absorption of the domestic currency. This could lead to strengthening/weakening of the domestic currency.

    5. International Economic/Political Scene : Apart from the happenings that happen in the domestic country, international events also affect the currency. For example, a civil war in a country where India has significant investments in assets might lead to the weakening of rupee in India.

    Although a currency is never in a static equilibrium, but a stable currency is reflective of a healthy economy with its trade equilibrium as well consumer behaviour under expected range.

  4. The various factors that affect the value of Indian currency in international market on a given day are :
    1.inflation : A country with consistently higher /lower inflation rate exhibits a falling / rising currency value ,as its purchasing power decrease /increase relative to other currencies with /without inflation in India ,depreciation /appreciation in currency in relation to currencies of its trading partners is seen .This is usually accompanied by higher /lower interest rates .
    2.Differentials in interest rates :
    Change in interest rates affect the currency value and dollar exchange rate .Forex rates , interest rates and inflation are corelated .Inc /Dec in interest rate cause a country ‘scurrency to appreciate /depreciate because higher / lower rates to lenders , thereby attracting more /less foreign capital which cause rise /fall in exchange rate .
    3. Country ‘s Current Aacount /BOP :
    This affects the value of our domestic currency S the country’s current account reflect the balance of trade aswell the earring on foreign investment .It consists of total no. Of transactions including the import, export , debt etc .A deficit in current account due to high imports than exports cause depreciation of the domestic currency .
    4. Terms of trade : it refers to the ratio of the exports price to the import price .A country’s terms of trade improve if its exports price are higher thAn its import price as it results in high revenue ,which causes high demand for country’s currency and increase in country’s currency value .
    5. Government debt : Country with govt debt is less likely to acquire foreign capital,leading to inflation .Foruegn investors will sell off their bonds if the country exhibit the govt debt .As a result it affects (decrease ) the value of currency .
    6.Political state Political state and economic performance affects the value of the currency .A country with Political stability is more attractive to foreign investors .Inc in foreign capital leads to appreciation in value of its domestic currency while politically confused and unstable environment decrease the value of the domestic currency in relation to the foreign currencies .
    Therefore after summing up ,we can aptly conclude that value of domestic currency is affected by multi factors .

  5. International currency exchange uses two important rates 1. NEER 2. REER. Nominal effective exchange rate is an index against a basket of currencies not adjusted for inflation while REER is adjusted for inflation. They measure competitiveness of a currency I.e price level some of the factors that affect NEER and REER are inflation in different market , purchase power parity of different economy, foreign money inflows and outflows, political stability , BOP / trade imbalance or surplus, forex reserves etc.

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