What causes currency to increase/decrease on a daily basis?
Without a lecture in short; In a day a currency can be impacted greatly. History has shown in some markets that impact is realized minute by minute, hour by hour, or daily--dependant on the markets. If a currency is based on the USD, and the USD falls at the same time the country of currency decides to put stronger regulations on foreign interests (ie doesn't allow foreign investments) then it can dramatically decline a currency. On the otherhand news of the World, might be realized that increase the need for bamboo--which that same country is a chief exporter of and a new president may be announced--further increasing the currency--in short the rise and fall in a day. imports--then the currency could fall dramatically. domestic issance, foreign markets, inflow of currency, large holders of money (ie citibank), the value of that currency, foreign interest, interest, politics, and how, when and where its valued impact the rise and fall of any currency. The way or standard practice a currency is valued, daily, hourly, will impact the increase and decrease daily. Some terms you can easily investigate The Ithaca Dollar , currency system ie) Fiat, commodity-valued and , commodity - backed, Monetary policy (expansion), An example: Lets take National currencies as an example ie) USD, DM, Fr...these are mediated through the USD, issued through a Central Bank (some owned by central bank others by governments). interest bearing, debt-based. Currency is impacted regularly by market influxes, trends, bonds, stocks, interest, policy, dependancies. USD can increase in value in different ways. 1) comparison to other Countries/Markets 2) Policy Expansionary Monetary in the US---the Federal Open Market Committee wishes to increase the money supply, it can do a combination of things like a) Purchase securities on the open market, known as Open Market Operations b) Lower the Federal Discount Rate c) Lower Reserve Requirements I 'm assuming you mean all currency and not just U.S. and you mentioned Daily so it's a loaded question. Currency is really sort of like an agreement, either you agree on a value, or you back it with a claim to a commodity, (ie fiat, commodity-valued, commodity-backed). So the causes of currency fluctuations daily can vary on how that currency is based. The simple answer is: the supply of money. The strength of the dollar can increase and decrease on a daily basis in small increments based on the ratio of imports: exports. The bigger the gap between imports and exports (trade deficit- importing more than exporting) the less the dollar is worth (buying power). The Fed can also lower the discount rate. Many people don't understand what this means. It is the rate at which federal banks can borrow from the federal government. This increases the money available to lend to corporate borrowers, which raises the supply of money, which causes the value to decrease.
The cause of value of currency to increase would be undersupply or deflation. The cause of the value of money to decrease would be the oversupply or inflation.
Fluctuations in Indias Rupee Rate and its Economic Impact
Posted on December 5, 2011 by India Briefing Dec. 5 After depreciating to a record low of 52.73 against the U.S. dollar on November 22, the Indian rupee (INR) rose in value to 51.206 per dollar on Friday to complete the currencys first weekly advance since October. The Indian rupee is under great stress as overseas investors are paring their exposure to Asias third-largest economy amid international uncertainty and mounting worries over the domestic economy. On November 21 alone, overseas funds sold more than US$500 million worth of Indian-listed shares over the five trading sessions, reducing net inflows for 2011 to under US$300 million a tiny sum compared with the record investments of more than US$29 billion experienced in 2010. The rupee has lost more than 10 percent of its value this year, making it one of the worst performing currencies in Asia. The rupees modest 2.1 percent advance against the dollar last week occurred as six monetary authorities, led by the U.S. Federal Reserve, agreed to lower the interest rate on dollarliquidity swap lines. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said. It coordinated the move with the European Central Bank and monetary authorities in Canada, Switzerland, Japan and the U.K. Sentiment has improved slightly after the central banks actions, Vikas Babu, a Mumbaibased currency trader at state-owned Andhra Bank, told Bloomberg News. This is unlikely to last long as only the symptoms of the crisis are being tackled, and I expect dollar-buying to resume soon. The exchange rate of the Indian rupee is dependent upon the market conditions. Though, in order to sustain effective exchange rates, the Reserve Bank of India (RBI) actively trades in the US$/INR currency market. The RBI also intervenes in the currency markets to maintain low volatility in exchange rates and remove excess liquidity from the economy. The rupee is pegged by the Bhutanese ngultrum at par and with the Nepali rupee at INR1 to NPR1.6. India has a managed floating exchange rate system. This means that the Indian government intervenes only if the exchange rate gets out of hand by increasing or reducing the money supply as the circumstances demand. Impact on economy Rupee appreciation makes imports cheaper and exports more expensive. According to intelligence reports by the Associated Chambers of Commerce and Industry of India, sectors
like petroleum and petroleum products, drugs and pharmaceuticals and engineering goods which have import inputs of as much as 77 percent, 19 percent and 21 percent, respectively will gain if the rupee appreciates. They would have to pay less for the imported raw materials which would increase their profit margins. Likewise, a depreciating rupee makes exports cheaper and imports expensive. So, it is good news for industries such as IT, textiles, hotels and tourism which generate income mainly from exporting their products or services. Rupee depreciation makes Indian goods and services cheaper for overseas buyers, thus leading to increases in demand and higher revenue generation. The foreign tourists would find it cost effective to come to India, therefore increasing the business of hotel, tours and travel companies. Indias IT sector is dependent on foreign clients, especially the United States, for more than 70 percent of its revenue. When an IT company gets a project from a client, it pre-decides on the length of the contract and the cost of the project. The contracts with U.S. clients are usually quoted in U.S. dollar terms. So, the fluctuation in the exchange rate can bring about a considerable difference in the performance of a company. Some companies undertake a range of measures like hedging exchange risks using forwards and futures contracts. This helps in mitigating some of the losses due to exchange rate fluctuations, but none-the-less the impact is substantial. The exchange rate is a significant tool that can be used to examine many key industries; with fluctuations potentially having a serious impact on the economy, industries, companies, and foreign investors. Rupee appreciation is generally helpful for industries which rely closely on imported inputs while depreciation of the rupee is welcome news for industries which are exporting a majority of their products. Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact india@dezshira.com, visit www.dezshira.com, or download the firms brochure here.
3 Responses to Fluctuations in Indias Rupee Rate and its Economic Impact
eally good but i would like to know the reasons for fluctuation in indian rupee. Shivamurthy S says: June 2, 2012 at 5:23 pm It is something like logistic(adds to the cost not to the value) cost for students preferring foreign universities specially US varsities. This is sometime very difficult to manage with extra borrowings to pay for depreciating rupee against dollar. education expenditure increasing more than 20% than estimated earlier. Chris Devonshire-Ellis says: June 8, 2012 at 3:20 pm Whats causing the fluctuations are Foreign trade inflows and outflows that are occurring due to some of the recent government policies being erratic, meaning youre getting flows out
then flows in. The currency responds. At present the low rupee is good if youre earning in US dollars youre getting more rupee spending power. Good for India exports. But not so good for imports, or inflation. Its manageable, but they are making rather heavy going of the value of the rupee I agree. Chris
How did the fall in value of the rupee affect you?
In my earlier article, I have explained why does rupee value depreciate against the dollar currency and the various factors affecting the changes in the currency. As of writing this article, still the pressure on the Rupee against Dollar is more and we are seeing the further erosion on the rupee value. The impact on the economy is more if the currency value changes drastically. It has the positive and negative impact on economy, inflation and lifestyle of people in a country. It is not easy for a common man to understand the impact in his life because he doesnt understand the facts about the economics of the country. But, it could be realized if he could read the various magazines and news channels on the similar topic. This article would put down those points in very simple terms to make the things clear for every one. This article explores the possible impact on our country if the value of the currency is further going down. If you have any doubts, please post it in the comments section. Subscribe to our future articles here.
Dis Advantages 1. Imported goods and Oil prices
In India, most of the electronics related goods are imported from outside are at least raw materials taken from abroad. If you want to own a gadget or television sets in the near future, it may cost more than what it was in the few months back. As we come to know, the mobile handset makers has hiked the prices very recently due to the rupee value decline. Every imported goods will see the rise in the price. This include hardwares like computers,etc. If you are planning to buy a electronics now, you are going to pay more than what you would have paid six months earlier. India is mostly depend on other countries for the import of Oil products. When rupee value is decreasing, oil companies has to pay more money to buy the fuel from abroad. I have earlier written about the oil price crisis in India and it has more details to know why the oil price is very high in India compare to other countries. Decrease is rupee value is one of the reason for oil price increase.
2. Foreign Education & Travel
Indian students who want to earn a foreign degree would have to spend more money for pursuing the education in abroad. According to the statistics, the existing cost of education and travel would shop up at least 10-15% because of the rupee value depreciation.
3. Importers and Foreign currency borrowers
If you closely looked into the results of the companies in the stock market, compared to the previous quarter the results are negative because of the currency value decrease. That too company having more debt in the foreign currency has to shell out more money to repay their loans. It would continue for the next quarter as there is no sign of improvement in the rupee value against the dollar currency.
Advantages 1. Foreign currency remittances
The one who are getting more advantages on the rupee value decline is foreign currency remittances to India. For example, if your son is working in USA and sending money to India through remittances. You would receive the more money because of the rupee value. If you are in abroad and have accumulated more money in the NRE bank account, it is right time to make the remittances to India to get the advantage of rupee value decrease. Apart from the working professionals in abroad, those who are getting money in the dollar currency for their work which is done in India also in the positive side. For example, you have a blog or website in that selling advertisement or advertisers paying through PayPal in the dollar currency would gain more in this scenario. There are millions of bloggers or small business owners who are getting advantages because of this rupee value depreciation.
2. Exporters
When it comes to the industry, the exporters benefit more on the rupee value decrease. IT companies would benefit more because of their exposure to the foreign currency income. The companies like Infosys and TCS has gained more in the stock market because of their outlook in the coming months are very good due to the rupee value decrease. Apart from the IT companies, textile manufactures would benefit more in this scenario.
Summary
This is the another article on the rupee value decrease and its impact on the country. The above points are very high level and would give basic idea for you to understand who are benefited from the currency value changes and how it would impact the countrys inflation and macro economy. If you have any doubts, please post it in the comments section.
