INTRODUCTION/ STATEMENT OF PURPOSE

The value of currency and its determination is a topic that has been of keen interest for
me. Through this project, I intend to explore the facts and reason out the what’s and
whys that has brought the Indian currency to where it stands in the global market, and
the factors which affect it

MEANING/DEFINITION
Currency is a generally accepted form of money, including coins and paper notes,
which is issued by a government and circulated within an economy. Used as a medium
of exchange for goods and services, currency is the basis for trade. The value of this
currency is determined by the demand for it, just like the value of goods and
services.

HISTORICAL ASPECT
FLOATING EXCHANGE RATE SYSTEM: A floating exchange rate is a regime where
the currency price of a nation is set by the forex market based on supply and
demand relative to other currencies. This is in contrast to a fixed exchange rate,
in which the government entirely or predominantly determines the rate

FIXED RATE: Determined by the government through its central bank. The rate is
set against another major world currency (such as the U.S. dollar, euro, or yen).
To maintain its exchange rate, the government will buy and sell its own currency
against the currency to which it is pegged. Some countries that choose to peg
their currencies to the U.S. dollar include China and Saudi Arabia.

There are three ways to measure the currency:

1. EXCHANGE RATE: Forex traders on the foreign exchange market determine
exchange rates. They take into account supply and demand, and then
factor in their expectations for the future.
2. VALUE OF TREASURY NOTES: They can be converted easily into a currency
through the secondary market for Treasuries
3. FOREIGN EXCHANGE RESERVES: That is the amount of a currency, say
dollars held by foreign governments. The more they hold, the lower the
supply. That makes U.S. money more valuable. If foreign governments
were to sell all their dollar and Treasury holdings, the dollar would
collapse. U.S. money would be worth a lot less.
FALL OF THE INDIAN RUPEE

The Indian rupee (INR) suffered sharp losses against the US dollar (USD) amid
turmoil in both global equity and currency markets. The rupee fell to 70.74 against the
US dollar, as compared to its previous close of 69.60 a dollar - its biggest one-day fall
in nearly six years.

WHY RUPEE AT ALL TIME LOW

1. THE LIRA CONNECTION: Fall of the official Turkish currency, Lira, by 40% against the US dollar. This
crisis has led to tension in the global market and is affecting the developing countries, like India more

2. DEPENDANCY ON OIL IMPORTS: India imports 80% of its crude oil consumption, making it more
vulnerable to changes of prices of crude oil in the global market. If prices of crude oil increases, the
import costs of India inc. , affecting current accnt balance, which affects currency value

3. HUGE CURRENT ACCOUNT DEFICIT: Increasing imports of crude oil and incr in its price leads to
growing demand of the dollar, as we need more dollars to finance our imports

4. US Fed RATE CHANGES: hike in Fed rates (as it quadrupled in 2018) strengthens the dollar and
decreases value of INR

5. GLOBAL MARKET: The trade war between US and China, 2 of the world’s strongest economies is
causing growing unease amongst global investors and Indian economists

How will the in Rupee Indian fall affect economy?

1. Cost of oil imports: Crude oil can be called a major engine for the growth and working of the
Indian economy with its vast utilities. Since India imports more than 80% of its oil needs, a
depreciation of Rupee will increase the cost of our humongous oil imports. This, in turn, can
cause our current account deficit to worsen.
2. An increase in the import cost will directly affect the Indian corporate market for the worse.
3. Inflation: Domestic currency appreciation and inflation work in the opposite directions. So, a
depreciation of the domestic currency means a potential increase in inflation.
4. To ward off an increasing inflation, the central bank of a country generally increases the
interest rates. Consequently, people are able to borrow less money, and hence, they also have
less to spend, keeping the inflation in check. Reserve Bank of India (RBI) might resort to
increased interest rates too, further increasing the effect on corporate
ADVANTAGES AND DISADVANTAGES

Advantage:
~Exports become cheaper, more competitive to foreign buyers. Therefore, this
provides a boost for domestic demand.
~Travel to India gets cheaper; local industry may benefit.
~Those working abroad can gain more on remitting money to their homeland.
~Ultimately, it assists in reducing the current account deficit.

The ability of depreciation to affect the exports and imports depends upon the
demand elasticity of goods and services exported or imported. For instance, if
the oil imports are demand inelastic i.e. price of oil has little impact on its import
demand, depreciation will have little impact on current account deficit.

Disadvantages:
~Depreciation strengthens inflationary forces. When the inflation rises, prices
of goods and commodities shoots up. Therefore, the purchasing power of the
rupee falls down.
~A depreciation of the domestic currency results in higher import costs for the
country. Failure of a similar rise being experienced in the prices of exportable
commodities is going to result in a widening of current account deficit (CAD) of
the country.
~Foreign Travel and Overseas Education becomes costlier.
~The interest burden would increase on foreign currency denominated debt.
~A large and rapid devaluation may scare off international investors. It makes
investors less willing to hold government debt because it is effectively
reducing the value of their holdings
CASE STUDY- INDIA

 5 YEAR PLANS
 DURING DR. MANMOHAN SINGH’S TIME(SOCIAL AND
POLITICAL REASONS)
 OIL PRICES AND EXCHANGE RATES