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Home Money Today Cover Story February 2012 Story Search

Solving The Riddle

Pritam P Hans Print Edition: February 2012

Withtheexceptionofsomeonelivinginacaveonanundiscoveredisland,everyone
usesmoney.Shopsacceptcurrencynotesandcoins,buttheyalsoacceptcredit
cards.Iscreditcardmoney?

Moneyisthevalueassignedtoacommodity,apieceofpaper,acoinorelectronic
data(thinkonlinebankingandcreditcards).Itcanbeofdifferenttypescommodity
money,representativemoney,fiatmoneyandcommercialbankmoney.Goldcoins,
cocoabeans,cattleoranythingthathasavalueofitsownandisusedasamedium
ofexchangeiscommoditymoney.Theuseofcommoditymoneyissimilartobarter,
exceptthatthecommodityusediswidelyacceptedandcanbeeasilyhandled.

Representativemoneyistokencoinsandnotesthatcanbeexchangedforafixed
amountofpreciousmetalsorothercommodities.Incontrast,fiatmoney'svalueis
imposedbythegovernment,whichmakesrefusalofpaymentsmadeinthenotified
legaltender,intheformofcurrencynotesandcoins,illegal. LATEST MUSTREAD TECHNEWS

P V Sindhu new brand

Instrumentssuchascheques,demanddraftsandbanker'sdraftsarecommercial
ambassador of Vizag Steel
bankmoney.Theyexistasentriesinledgersoffinancialintermediariesandcanbe
usedtomakepaymentsforgoodsandservices.
Trump's net worth down
THECHANGINGFACE $800m, falls in Forbes
wealth ranking

Moneyisnotanorganiccreaturebutitsvaluekeepschangingwiththesocietyand
itseconomicconditions.Onerupeein1947isnotthesameasonerupeetoday, Swachh Bharat programme adaptation of
bothintermsofappearanceandpurchasingpower. Egypt project: World Bank
Prez

Thevalueofacountry'scurrencyislinkedwithitseconomicconditionsand
policies.
Thevalueofacurrency
dependsonfactorsthat
affecttheeconomysuchas
trade,inflation,
employment,interestrates,
growthrateandgeopolitical
conditions.
PramitBrahmbhatt
CEO,AlpariIndia
Indian cotton exports to
Pakistan slump amid
tensions
"Thevalueofacurrencydependsonfactorsthataffect
theeconomysuchasimportsandexports,inflation,
WTO panel discusses
employment,interestrates,growthrate,tradedeficit,
India's paper on TFA in
performanceofequitymarkets,foreignexchange services
reserves,macroeconomicpolicies,foreigninvestment
inflows,bankingcapital,commoditypricesand
MORE
geopoliticalconditions,"saysPramitBrahmbhatt,chief
executiveofficer,AlpariFinancialServices(India),a
foreignexchangebrokerage.

Incomelevelsinfluencecurrenciesthroughconsumerspending.Whenincomes
increase,peoplespendmore.Higherdemandforimportedgoodsincreasesdemand
forforeigncurrenciesand,thus,weakensthelocalcurrency.

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10/26/2016 RupeeWhatleadstothechangeinthecurrency'svalue?

Balanceofpayments,whichcomprisestrade MoneySupply
balance(netinflow/outflowofmoney)andflow Amountofcurrencyin
ofcapital,alsoaffectsthevalueofacountry's circulation
currency.

"Acountrythatsellsmoregoodsandservicesin
overseasmarketsthanitbuysfromthemhasa
tradesurplus.Thismeansmoreforeigncurrency
comesintothecountrythanwhatispaidfor
imports.Thisstrengthensthelocalcurrency,"
Comprisesallthecurrencyin
saysKishoreNarne,head,commodityand
theeconomyaswellasthe
currencyresearch,AnandRathiCommodities,a
moneyinsavingsandcurrent
brokeragehouse.
accountsheldwithbanks
(demanddeposits).
Anotherfactoristhedifferenceininterestrates
betweencountries.LetusconsidertherecentRBI
movetoderegulateinterestratesonsavings
depositsandfixeddepositsheldbynonresident
Indians(NRIs).Themovewaspartofaseriesof
stepstostemthefallintherupee.Byallowing
bankstoincreaseratesonNRIrupeeaccounts
andbringthemonaparwithdomesticterm
depositrates,theRBIexpectsfundinflowsfrom
NRIs,triggeringariseindemandforrupeesand
anincreaseinthevalueofthelocalcurrency.
NEWSYOUCANUSE
Aviation authority says no to clicking
TheRBImanagesthevalueoftherupeewith Includesmoneyheldinpost pictures near aircraft
severaltools,whichinvolvecontrollingitssupply officesavingsaccountsalong
What to do to if you own a Samsung
inthemarketand,thus,makingitcheapor withM1.Itexcludesmoneyin Galaxy Note 7
expensive. postofficefixeddepositsand
Pre-booking for iPhone 7 and iPhone 7
NationalSavingsCertificates. Plus begins in India
"SomewaysthroughwhichtheRBIcontrolsthe
BSNL all set to match Reliance Jio 'tariff-
movementoftherupeearechangesininterest by-tarrif'
rates,relaxationortighteningofrulesforfund
Reliance Jio: SIM card, 4G plans, apps
flows,tweakingthecashreserveratio(the and more
proportionofmoneybankshavetokeepwiththe
iPhone 7 and iPhone 7 Plus Indian price
centralbank)andsellingorbuyingdollarsinthe list released
openmarket,"saysBrahmbhattofAlpari.
ComprisesM2moneysupply
TheRBIalsofixesthestatutoryliquidityratio, plusfixeddeposits(ortime Social News
Business Today
thatis,theproportionofmoneybankshaveto deposits)heldwithbanks.Itis
investingovernmentbonds,andthereporate,at usedasacommonmeasureof
whichitlendstobanks. moneysupply.

Whileanincreaseininterestratesmakesa
currencyexpensive,changesincashreserveand
statutoryliquidityratiosincreaseordecreasethe
quantityofmoneyavailable,impactingitsvalue.
People are in for a rude shock at the time of
selling the asset - the 22-carat #gold
INFLATIONARYPRESSURE jewellery you paid for may turn out to be 18
IncludesM3moneysupply
alongwithotherpostoffice 32 m Business
Everygenerationcomplainsaboutpricerise. Today
depositsaswell.National
Pricesshootupwhengoodsandservicesare
SavingsCertificatesarenot
scarceormoneyisinexcesssupply.Ifprices
includedinM4either.
increase,itmeansthevalueofthecurrencyhas
erodedanditspurchasingpowerhasfallen.

Letussaythecentralbankofacountryincreasesmoneyflowintheeconomyby4
percentwhileeconomicgrowthis3percent.Thedifferencecausesinflation.Ifthe
growthinmoneysupplyis10percent,inflationwillsurgebecauseofthemismatch
http://www.businesstoday.in/moneytoday/coverstory/rupeedollarvaluedropfactorsforfall/story/21881.html 2/7
10/26/2016 RupeeWhatleadstothechangeinthecurrency'svalue?

betweeneconomicgrowthandmoneysupply.Insuchascenario,loanrepayments
willbealesserburdenifinterestratesarefixed,asyouwillpaythesameamount
butwithalowervaluation.

Afallinpurchasingpowerduetoinflationreducesconsumption,hurting
industries.Importsalsobecomecostlier.Exporters,ofcourse,earnmoreinterms
oflocalcurrency.

However,iftheincreaseinmoneysupplylagseconomicgrowth,theeconomywill
facedeflation,ornegativeinflation.Thepurchasingpowerofmoneywillincrease
whentheeconomyentersthedeflationarystate.Ifyouthinkdeflationwillhelpyou INSIGHT
consumemoreandenjoylifemore,youarewrong.
Gains in the bond yields are
behind us
Unlessthefallinpricesofgoodsisbecauseofimprovedproductionefficiencies,you V. Srivatsa
willhavelessmoneytospend.Ifyouhaveafixedinterestloantorepay,yourdebt
willhaveahighervaluation.Yieldsfromfixedincomeinvestmentsmadebefore
Surgical Strike at Tata Sons: Ratan Tata's
deflationsetinwill,ofcourse,increaseinvalue. deep distrust behind Cyrus
Mistry's removal?
MINTINGMONEY Rajeev Dubey

Cyrus Mistry's Exit: A Look at

Afantasyworldwheretreeshavebanknotesandbearcoinsinsteadoffruitsmight His Life at the Helm of Tata
soundlikeadreamcometrue.Economistswillbethedevil'smessengerinthat Group
worldwhentheybreakthenewsthatyourmoneyisasgoodasdryleaves. Nevin John

MORE
Ifyouarelookingforamachinethatcanprintmoney,justmeetsomeonewho
actuallyownsonethegovernment.Moneyisprintedbygovernments,butthey
cannotprintallthemoneytheyneed.Whenagovernmentprintsmoneytomeetits
needswithouttheeconomygrowingatthesamepace,theresultcanbe
catastrophic.Zimbabweisarecentexample.

Afterthe1990slandreformsinfreeZimbabwe, TrueValue
farmproductionaswellasmanufacturing Relationamongvalueof
declineddrastically.However,thegovernment currency,itssupplyand
continuedtoprintmoneyforitsexpenses. economicgrowth
Zimbabweansstartedlosingfaithinthelocal
currency.Asinflationsurgeddrastically,the
Zimbabweandollarswereprintedin
denominationsashighas100trillion.Afterthe
currencylostitsvalue,peoplestartedusingUS
dollars.InApril2009,thecountryputits
currencyonholdandswitchedtoUSdollars.
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Inthepast,governmentsusedtobacktheir MORE
currencieswithgoldreservesoraforeign Letusassumethatafarmer
Tweet currencysuchastheUSdollarthatcouldbe hasatankinwhichhestores
Share convertedintogoldondemand.Thegold waterforirrigation.He
39
standardcurrencysystemwasabandonedas decidestoaddanotherfield
therewasnotenoughgoldtoissuemoneyand andbuildsanothertankthat
Share
currencyvaluationsfluctuatedwiththesupply heconnectstotheexisting
anddemandofgold. one.However,thereisno
increaseintheamountof
Share
Inthemoderneconomy,governmentsprint waterharvested.Attheendof
moneybasedontheirassessmentoffuture therainyseason,hehastwo
economicgrowthanddemand.Thepurchasing fieldsbutwaterforjustone
powerofthecurrencyremainsconstantifthe field.
increaseinmoneysupplyisequaltotherisein
grossdomesticproductandotherfactors
influencingthecurrencyremainunchanged.

FOREXDEMAND
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10/26/2016 RupeeWhatleadstothechangeinthecurrency'svalue?
PHOTOS VIDEOS

Thoughinternationaltradeandmovementof
HowHonda'snew
peopleisincreasingrapidly,thereisnocurrency Brioborrows
thatisacceptableacrosstheglobe.Whetheryou featuresfromAmaze

goforhigherstudiestotheUSorflytoRiofora
vacation,youhavetopayforservicesandgoods
inthecurrencythatisacceptedinthecountry. Now,considerasituation
Evenwhileshoppingonlineonstoresrunby whereheknowsthatthe Bestsmartphones
foreigncompanies,youhavetopayinforeign youcanbuythis
rainfallwilldoublefromthe festiveseason
exchange. nextseason.Hedecidestoadd
anothertank.Atendofthe
Theforeignexchangerateforconversionof rains,boththetankshave
currenciesdependsonthemarketscenarioand water.Ifthewatertankisthe
WorldTourismDay:Top20special
theexchangeratebeingfollowedbythecountries. currency,thestoredwateris
destinationsinIndia
Floatingexchangerates,orflexibleexchange thepurchasingpower.
rates,aredeterminedbymarketforceswithout
activeinterventionofcentralgovernments.For
instance,duetoheavyimports,thesupplyofthe
rupeemaygoupanditsvaluefall.Incontrast,
whenexportsincreaseanddollarinflowsare
high,therupeestrengthens.
MORE

Earlier,mostcountrieshadfixedexchangerates. Theincreaseinrainfallislike
Thissystemhasbeenabandonedbymost growthintheeconomy.
countriesduetoriskofdevaluationofcurrencies Merelyincreasingthenumber
owingtoactivegovernmentintervention.Most oftanks(printingcurrency)
countriesnowadoptamixedsystemofexchange doesnotincreasethe
rateswherecentralbanksinterveneinthemarket irrigationpower(purchasing
tobuyorsellthedifferentcurrenciestocontrol power).Onehastomakesure
themovementoftheirowncurrencies. thatthetanks(currencies)get
enoughrainwater(economic
Noteveryonelosesinaweakcurrencyscenario. growth).
Exportersacrossthe17countryeurozone,for
instance,arebenefitingfromaweaklocalcurrency.Sometimescountriesuse
variouswaystokeeptheircurrenciesundervaluedtopromoteexports.Chinese
Renminbiisonesuchcurrencythatseveraleconomistssayisundervalued.

BEHINDTHEFALL

Nowthatweknowthefactorsthatdeterminethevalueofacurrency,howdoesthe
rupeeinyourbankaccountandpursestandatpresent?Overthepastfewmonths,
sinceAugust,therupeehasbeenweakeningagainstthedollar.
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"Therecentfallintherupeewasmainlyduetoconditionsintheeurozone,
Tweet plungingstockmarkets,fallingforeigninvestmentinflowsandstrengtheningofthe
Share dollar,"saysBrahmbhattofAlpari.
39
"Risingfiscaldeficitanduntameableinflationwerebehindthefallintherupee.As
Share
Indiarunsalargecurrentaccountdeficit,itneedsaconstantinflowofdollars,
whichwasnotthere.Highoilpricesinflatedtheimportbillandresultedinfurther
wideningofthecurrentaccountdeficit,whichacceleratedtherupeefall,"says
NarneofAnandRathi.
Share

"Thedecisionbythegovernmenttoallowforeigninvestorstodirectlyinvestin
Indianequitycouldbringsomecapitalflowsandhaveapositiveimpactonthe
economyandtherupee,"addsNarne.

TherupeehasrecoveredsomewhatinJanuary,butthedangerstilllooms.Ifyou
needsomeforeigncurrencyinthefuturesuchasforthetuitionfeeofyourdaughter
studyingintheUSorasummervacationinIreland,planrightnowandhedgeyour
http://www.businesstoday.in/moneytoday/coverstory/rupeedollarvaluedropfactorsforfall/story/21881.html 4/7
10/26/2016 RupeeWhatleadstothechangeinthecurrency'svalue?

riskwiththehelpofcurrencyfutures.Considerthebasicsofcurrencymovements
andtheirlikelyimpactbeforetakingyournextinvestmentdecision.

Hotairballoonfigures(below)arehighestdailyinflationratesin
recenthistory.At100%dailyinflation,pricesdoublein24hours.
Source:CatoInstitute

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