Presentation On Currency Appreciation And Depreciation

Presented by: Uday Chauhan

MBA 1st Sem(sec -b)

 Exchange rate The rate at which a currency can be exchanged. It is the rate at which one currency is sold to buy another. Foreign exchange market Also known as Forex or FX. It is a market to trade currencies Indian foreign exchange rate system India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar

FACTORS AFFECTING EXCHANGE RATES

1. Inflation rates 2.Interest rates 3. GNP growth rates

Factors driving the demand for a currency?

Rupees appreciation or depreciation against the dollar depends on the change in demand and supply for both the currencies. If the demand for rupee is comparatively high, rupee appreciates; if low, it depreciates. The important question here is what factors drive the demand for a currency? They are: Trading in currencies in the Forex market Inflation Rate Export-Import: Interest Rate

Currency Appreciation

When rupee is said to be appreciating it means that our currency is gaining strength and its value is increasing with respect to dollar.

Why the Indian rupee appreciated ?

Indian rupee appreciation against dollar impacted heavily to the following:

Exporters Importers Foreign investors

Benefit
The appreciation of Rupee not only has softened the impact of higher oil prices and made capital goods cheaper.
Encouraged Indian tourists to travel abroad. Students who want to study abroad has to spend less money as US dollar is now cheaper by a similar quantum in rupee terms. Importers are also benefited by paying less money Will affect employment creation in BPOs in a big way. Customer will get more option to select. Though the strengthening of the rupee will benefit certain industries, others might face the burnt. But the gain will be to the entire Indian economy. For the development of any country, strong infrastructure is required and that need huge investments. Foreign Direct Investments would truly help India to stay as a strong economy in the world.

Currency Depreciation

When rupee depreciates it means our currency is getting weaker & its value is falling with respect to dollar. .

Example
Suppose, currently, the exchange rate is Rs. 45 = $1, 10 months later, either of the following two cases can happen: Case1: The exchange rate is say Rs. 40 = $1. This means rupee has appreciated or gotten stronger by approx 11% and you would be paying less to for a dollar Case2: The exchange rate is at Rs. 50 = $1. This means rupee has depreciated or gotten weaker by approx 11% and you end up paying more for a dollar.

Effects on
Exports Imports Regulation

How Changes in the Current Exchange Rate Affect Expected Returns

Depreciation of a countrys currency today lowers the expected domestic currency return on foreign currency deposits. Appreciation of the domestic currency today raises the domestic currency return expected of foreign currency deposits.

The example of Infosys results between 2007 and 2008 to understand the impact that the fluctuation in exchange rate can have on the performance of a company
The income of Infosys, in 2008, increased by 34.1% to $ 3912 million but because of rupee appreciation of 11.2%, from Rs. 45.06 to Rs. 40, in rupee terms, its income increased only by 19%.

Every 1% movement in the Rupee against the US Dollar has an impact of approximately 50 basis points on operating margins Infosys Annual Report However the IT sector does not just sit idle and let exchange rate play the spoil sport. It undertakes various measures like hedging exchange risks using forward and future contracts. This helps them in mitigating some of the loss due to exchange rate fluctuation but none the less the impact is substantial. Exchange rate is thus an important tool that can be used to analyze many key industries like IT, Textiles etc. Fluctuating exchange rate has a significant impact on the economy, industries, companies, foreign investors etc. Rupee appreciation is beneficial for industries which rely heavily on imported inputs while depreciation of rupee is good news for industries which are exporting majority of their production.

Conclusion
Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage.

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