Exchange rate - class-XII

A change from RS 140 = 2 pounds to Rs 60 = 1 pounds indicates that rupees is appreciating. Appreciation of domestic currency is a situation of a fall in exchange rate. Less rupees are needed to buy one pound.

When a domestic currency depreciates, its value relative to foreign currencies decreases. This makes domestic goods cheaper for foreign buyers, thereby stimulating exports.

In case of appreciation, lesser rupees have to be paid to exchange one US dollar, i.e. less than $Rs. 40/$ $

The supply of foreign exchange increases when foreign currency enters the domestic economy. Receiving a donation from abroad is an inflow of foreign currency, whereas imports, student expenses, and purchasing foreign assets are outflows that increase demand for foreign exchange.

In spot market, sale and purchase of foreign currency is settled immediately

Currency depreciation makes domestic goods relatively cheaper for foreign buyers, which increases the demand for domestic products abroad, leading to a rise in exports.

Flexible rate of exchange is the rate which is determined by the
supply-demand forces in the foreign exchange market. It is also called
'free exchange rate' or 'floating exchange rate' as it is determined by the free play of supply and
demand forces in the international money market.

Devaluation of currency mainly occurs in countries with fixed exchange rate. It refers to the reduction in the value of domestic currency by the government.

When receipts (inflows) exceed payments (outflows) of foreign exchange, the balance of payments is in a surplus state. A deficit occurs when payments exceed receipts.

A rise in the supply of a currency, while demand remains constant, leads to a decrease in its value, which is known as depreciation, not appreciation.

Importing goods requires paying in foreign currency. Therefore, an increase in demand for imports directly increases the demand for foreign exchange to settle those payments.

In a managed floating system, the central bank intervenes in the foreign exchange market to stabilize the currency by buying or selling foreign exchange reserves.

Devaluation is reduction in value of domestic currency by the government under fixed exchange rate system.It is a deliberate effort. On the other hand,
Depreciation is decrease in value of domestic currency due to market forces of demand and supply under flexible exchange rate system. 

This happens in case of fixed exchange rate system.
 Under Flexible exchange rate system, value of currency is determined by the market forces of demand and supply. 

Demand for American goods will rise in India due to appreciation of Indian currency. Appreciation of domestic currency is a situation of a fall in exchange rate, i.e, less rupees are needed to buy one dollar. Thus, making American goods cheaper and leading to an increase in their demand.

Accommodating transactions are those undertaken to cover the deficit or surplus in the balance of payments, making them dependent on the autonomous transactions that created the imbalance.

The foreign exchange rate and supply of foreign exchange is positively
related and it is upward sloping curve as because the components of
supply of foreign exchange rise as foreign exchange rate rises. For
example, exports rise as the foreign exchange rate rises.

Flexible rate of  exchange is the rate which is determined by the
supply-demand forces in the foreign exchange market. It is also called
'free exchange rate' as it is determined by the free play of supply and
demand forces in the international money market.

Managed floating is a tool employed by the Central bank to restore the
value of the country's currency in relation to other countries within
the desired limits, even when the exchange rate is determined by the
market forces of demand and supply.

The foreign exchange rate and supply of foreign exchange is positively
related and it is upward sloping curve as because the components of
supply of foreign exchange rise as foreign exchange rate rises. For
example exports rise as the foreign exchange rate rises.

Price of foreign exchange and growth of national income is directly related. When foreign currency becomes cheaper, it indicates that demand of foreign exchange is higher than the supply of foreign exchange. Hence, other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be negative.

Depreciation of US dollar will occur when Rs 65 have to be paid to
exchange one US Dollar instead of Rs 67 per dollar as less rupees are needed to buy
one dollar. Whereas, Indian rupee has appreciated as it is a situation of rise of foreign exchange rate.

The acronym NMCEX stands for National Multi-Commodity Exchange. The NMCEX merged with the Indian Commodity Exchange, (ICEX) in 2017. The combined exchange is India's third-largest commodities market.

Capital account convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market-determined rates.

Though devaluation in currencies are discouraged and negated with excessive pressure coming from the trading partners of the country, it ultimately makes goods of the country cheaper in the world market and the economy earns profit from the exports. The increase in profit of export takes place due to increase in 'volume' of the exports. In practice, exporters forego more goods to earn the same amount of foreign currency.

Rupee is fully convertible in the cases interest payment, remittances, grants and indirect foreign investment (though, it belongs to the capital account).

The country faces inflationary pressure. India's composition of trade is heavily biased in favour of imports which makes its trade balance become more negative.

Rupees is fully convertible in the cases of interest payment, remittances, grants, trade and indirect foreign investment (though, it belongs to the capital account).

Depreciation makes a country's exports become cheaper in the international market (the reason exports increase and get benefit). On the other hand with an appreciation in it the oil marketing companies of India are able to import cheaper crude oil.

Depreciation makes a country's exports become cheaper in the international market (i.e. the value of export items fall for the importers)this makes the country export more (increase in 'volume' of the export). Countries use depreciation as a tool to promote their exports (in present times, China has been doing the same)but such a policy is not healthy in long-term. 

Though India allows only partial convertibility to rupee in the capital account, it has the provision for its full convertibility up to $500million.

Arbitrage refers to the simultaneous buying or selling of foreign currencies with the intention of making profits from the differences between the exchange rates prevailing in different markets at the same time. The one who conducts arbitrage trade is known as an arbitrageur. Exchange arbitrage leads to change in demand and supply of currencies, so as to bring in a balance in exchange rates in all the markets.

For example, if $1 = Rs.10 in India and $1 = Rs.12 in Nepal. The arbitrageur in this case will buy dollars in India at Rs. 10 and sell it for Rs. 12 in Nepal. Thus, the demand rise in India will lead to rise in exchange rate in India, while, increased supply in Nepal will lead to fall in exchange rate in that market, leading to elimination of difference in exchange rates between both the markets.

Devaluation : The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency by giving it lower exchange value. Devaluation is used for improving , the balance of payment situation in the country. 
The exports of a country become cheaper for other countries when the currency is devalued, thus, if the export demand is elastic, it will lead to higher demand, similarly, the demand for imports will be lowered in the domestic country, which will help solve the balance of payment problem.

As now less dollars have to be exchanged to buy one pound, the value of the dollar against the pound has increased and its cheaper to buy pounds, this is know as an appreciation of the currency (in this case dollar). 

A surge in foreign capital inflows increases the demand for the domestic currency, causing it to appreciate. To prevent this appreciation, the central bank buys foreign exchange, thereby increasing the supply of domestic currency in the market.

When the firm decides to operate as a public limited company, the firm will need to offer a portion of its total shares to the public for the first time. This is known as an initial public offering.

In a fixed rate system, the price of the domestic currency in international markets is purely determined by the central bank of the country. It is pegged bilaterally and is artificially maintained at that level by the central bank. It is not allowed to appreciate and depreciate as per the market conditions, the central bank will intervene using forex reserves and hold the exchange rate at the pegged amount.

In a fixed rate system, the price of the domestic currency in international markets is purely determined by the central bank of the country. It is not allowed to appreciate and depreciate as per the market conditions, the central bank will intervene using forex reserves and hold the exchange rate at the pegged amount  The Banco Central De Cuba does intervene in the forex market for the Cuban peso and it is classified as a fixed currency. 

In a flexible rate system, the price of the domestic currency in international markets is purely determined by the market forces of supply and demand. It is allowed to appreciate and depreciate as per the market conditions, without intervention by the central bank. The Federal Reserve does not intervene in the forex market for the US dollar and it is classified as a freely floating currency.  

Forex (Foreign Exchange) market involves the simultaneous buying of one currency and selling of another to facilitate international trade and investment.

The foreign exchange rate of a currency is the price of a currency in terms of another, as it refers to the rate at which the currencies of different countries are traded or exchanged. The exchange rate can be expressed in either of the two ways, (i) the number of units of the domestic currency that exchanges for one unit of the foreign currency (eg. INR 68.54 for USD 1 ) or (ii) the number of units of the foreign currency that exchange for one unit of the domestic currency. (USD 0.015 to INR 1)

In a flexible rate system, the price of the domestic currency in international markets is purely determined by the market forces of supply and demand. It is allowed to appreciate and depreciate as per the market conditions, without intervention by the central bank. The Federal Reserve does not intervene in the forex market for the US dollar and it is classified as a freely floating currency.  

Facing high inflationary pressures and large government deficits the rupee was devalued in 1966 for the first time.

Foreign investment is a broad category that encompasses Foreign Direct Investment (FDI), Portfolio Investment, and Foreign Institutional Investment (FII).

When the country follows a fixed exchange rate regime the government constantly has to revalue and devalue the currency in order to maintain the pegged exchange rate. When there is upwards market pressure on the currency to appreciate, the central bank will artificially devalue the currency by buying up foreign reserves. 

A devaluation of the currency may help improve the balance of payments situation when it is in a deficit, as a devaluation makes it attractive to purchase domestic goods as it becomes relatively cheaper to do so thus the value of imports is likely to decrease and the value of exports is likely to increase. 

For devaluation to be successful, the country must be able to export more (improved performance and quality) and keep domestic inflation in check so that the price advantage is not lost.

SDR stands for Special Drawing Rights, which is an international reserve asset created by the International Monetary Fund (IMF).

When a country follows a floating exchange rate regime, it is possible for the currency to fall in value due to a fall in demand for the currency that can be caused for a variety of reasons like decline of demand for the country's exports or attractive investment opportunities abroad.

According to the RBI "The Liberalised Exchange Rate Management System (LERMS) was put in place in March 1992 involving the dual exchange rate system in the interim period. The dual exchange rate system was replaced by a unified exchange rate system in March 1993".

In 1999 the Foreign Exchange Management Act replaced the Foreign Exchange Regulation Act. This act makes offences related to foreign exchange civil offences.

FERA stands for Foreign Exchange Regulation Act, 1973.

India has achieved full convertibility of the Rupee on the current account, allowing for the free conversion of currency for trade in goods and services, but capital account convertibility remains restricted.

The full form of FCRA is Forward Contracts Regulations Act .