effect of rupee dollar exchange rate

What is Rupee appreciation and depreciation?

Whenever Indian government or other countries come out with their policies, many people start saying that it’s going to impact Indian rupee and country’s economy will get effected. What will happen to Indian rupee and how does that impact the country’s economy?

Let us take an example. If we want to buy $100 today and the dollar-rupee exchange rate is Rs.63, which means we can get 1 dollar for Rs.63. We have to pay Rs.6300 to get $100. But say you decided to buy $100 tomorrow and the exchange rate became Rs.64. Now we have to pay Rs.6400 to get $100. Here we have to pay more to get the same amount of $100. This tells us that rupee has lost its value and in economic terms we say Rupee has been depreciated.

In the same example if we want to buy $100 and the dollar exchange rate became Rs.62. Then we have to pay Rs.6200. This means that we have to pay less than normal. This is also known as appreciation of rupee which means rupee became stronger than dollar in terms of its value.

How does appreciation or depreciation of rupee impact our country’s imports and exports?

 

 

 

Effect on

 

 

Appreciation of Rupee

 

 

Depreciation of Rupee

 

 

Imports

Imports become cheap as they have to pay less than compared to what they paid earlier. People tend to buy more imported goods, this leads to more outflow of money from country.  Imports become costlier as compared to earlier. Say previously 1 dollar was Rs.63 and not it became Rs.65. People have to pay Rs.2 more to get the goods. Due to this imports will reduce and domestic goods consumption will increase.
 

 

Exports

Exports get less revenue as previously 1 dollar was say Rs.63, now they will get Rs.60. There is a loss of Rs.3. Due to this number of exports will reduce because people find it less advantageous. Exports get more revenue compared to previous scenario. Earlier 1 dollar was say Rs.63 now it became Rs.65, which will increase the revenue of exporters by Rs.2. Due to this exports in the country will increase.

 

What are the benefits of Rupee appreciation and depreciation?

In case of Country like India which is majorly an importer of goods, then costlier imports (Depreciation effect) will aid to enhance inflation and other spiral effects not conducive to economy growth. Also, will impact the foreign currency reserves of the Country. This will increase the deficit of the country in the long run if not kept in check.

If Rupee depreciates, our exports will become cheaper compared to other countries, this will aid the Make in India initiative as well. As our goods are cheaper demand for them increases.

In case of Appreciation, our exports relatively will earn less, this will reduce the earnings of people. Demand for our goods goes down as they are costlier. This is a disadvantage and government wants rupee to depreciate.

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