Impacts of Rupee Appreciation/Depreciation on Import

Topics: Foreign exchange market, Central bank, Currency Pages: 7 (2340 words) Published: March 27, 2013

An increase in the value of one currency in terms of another. Currencies appreciate against each other for various reasons, including capital inflows and the state of a country's current account. Typically, a Forex trader trades a currency pair in the hopes of currency appreciation of the base currency against the counter currency. CURRENCY DEPRICIATION:-

A decrease in the value of a currency with respect to other currencies. This means that the depreciated currency is worth fewer units of some other currency. While depreciation means a reduction in value, it can be advantageous as it makes exports in the depreciated currency less expensive. For example, suppose one unit of Currency A is worth one unit of Currency B. If Currency A depreciates such that it becomes worth half of one unite of Currency B, then exports denominated in Currency A are only half as expensive when trading in a Currency B market. SIGNIFICANCE:-

* When a country's exports are high, the buyers of these exports need its currency to pay for those exports. * When the country's central bank increases interest rates, people will want that currency to deposit in the banks to earn that higher interest rate. * When employment and per capita income in a country increase, the demand for its goods and services increases, along with demand for that country's currency in the local market. * Demand for any country’s currency on the foreign exchange market is determined by demand for that country’s exports of goods and services and by changes in foreign investment in that country. This is because when foreigners buy another country’s exports of goods or services they must pay for these in the currency of the exporting country. * In the same way, Supply of any country’s currency on the foreign exchange market is determined by that country’s imports of goods and services and by its investment in other countries. * Thus when the demand for a currency rises its price goes up and it becomes costlier. *  An increase in exports of a country will lead to an increase in demand for the currency and thus the value rises. *  Rapid domestic growth increases the demand for imports, while slow or no growth with foreign economies can cause a decline in demand for the country's exports. * If prices in both countries remain the same, depreciation will make foreign goods relatively more expensive to you, leading to a fall in imports. It also means that, even if prices remain the same, your goods will be cheaper to foreigners. They will buy more of your goods and exports will rise. As a result, your country's net exports will increase. * The devaluation of the dollar will have a positive impact on the importers, while it will have adverse effect on the exporters. Importers of goods and services will be getting the goods and services by paying less

Currency depreciation is not at all good for economy of a country. Government always keeps an eye on currency fluctuation. More depreciation can cause major loss to a country. All this is related to export and import of a country. If a currency depreciates, it is the exporters who make good profit, where as importers are on the losing side. Depreciation discourages purchases of imported goods stimulating demand for domestically manufactured goods. The governments worldwide monitor appreciation and depreciation by using powerful tools like the base interest rates, which are usually set by the country’s central bank. Many a times this tool is often used to intentionally depreciate the currency rates to encourage exports. However, this can cause major damage to imports. Always a balance has to be maintained between export and import. Within a span of 5 year, the value of INR has significantly increased from around 40 to 54.24 with respect to dollar. Indian economy is among the fastest growing economies of the world. The appreciation of the rupees...
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