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Introduction
Foreign currency is any currency other than the domestic currency For India all currencies other than Indian Rupee (INR) are foreign currencies Exchange rate is the price of one currency in terms of another
US $ 1 = Rs 45 1 = Rs 105 1 = Rs 85
Foreign investment
S$
R1
D$ O Q1
Quantity of foreign currency (USD)
Supply Curve
Rs per $
Depreciation of Rs E
S$
R1
The rise in demand creates a shortage in the $ market. Demand is greater than supply of $ the price (exchange rate) would rise
D Shortage
D$ O Q1 Q3 Q2
Quantity of foreign currency (USD)
Exchange Rates
Depreciation of the exchange rate: A fall in the value of Rs in relation to other currencies
each Rs buys less of the other currency e.g. $ 1 = Rs 45 $ 1 = Rs 50
Indian exports become relatively cheaper ( X) Imports to India become relatively more expensive ( M)
Rs per $
Appreciation of Rs
S$ S
R1
R
E E
The rise in supply creates a surplus in the $ market. Demand is less than supply of $ the price (exchange rate) would fall
Surplus
D$ O Q1 Q3 Q2
Quantity of foreign currency (USD)
Exchange Rates
Appreciation of the exchange rate: A rise in the value of Rs in relation to other currencies
each Rs buys more of the other currency e.g. $ 1 = Rs 45 $ 1 = Rs 40
Indian exports become relatively more expensive ( X) Imports to India become relatively cheaper ( M)
Credit Function
Hedging Function
Autonomous Entries
Accommodating Entries
Unilateral Transfers
Payments made without any quid pro quo Private transfers scholarships Government transfers aid and grants
Official transactions
impact the assets and liabilities of government e.g. repayment of foreign loans by government
portfolio investment
Disequilibria in BOP
Economic Factors
inflation developmental activities cyclical fluctuations access to new technology and new suppliers movements in oil prices
Political Factors
consistency in policies over time investor-friendly policies
Social Factors
tastes and preferences world-wide fashions