If exports go up, or foreign investors bring in foreign currencies into the country to invest in the stock exchange, the demand for the rupee goes up, and the external value of the rupee appreciates. Conversely, if the trade balance deteriorates, our demand for foreign exchange goes up, and the rupee depreciates.
At times, the government – precisely, the Reserve Bank of India - also influences the value of the rupee by buying or selling foreign exchange to affect the demand for the rupee. For example, the sale of foreign exchange by the RBI will result in a fall in the supply of the rupee.
When Foreign Institutional Investors pour money into the economy, a huge inflow of foreign money increases the demand for the rupee, causing the rupee to appreciate. However, this phenomenon might hurt Indian Exporters, because their products become more expensive on foreign markets.
But, when the situation is exactly the opposite, say, when the Indian-share market is bearish, Foreign Institutional Investors pull out of the Indian-share market, reversing the inflow of foreign exchange.
Most of the times, adverse trade balance, along with the outflow of foreign exchange due to the actions of the Foreign Institutional Investors, increases supply of the rupee on the foreign exchange market, resulting a fall in the external value of the rupee.
Like all other prices, the exchange rate too plays an important role in correcting demand or supply imbalances. For example, the lower the value of the rupee, the easier it is for Indian exporters to sell their goods abroad. Moreover, the higher volume of exports will help restrict the fall in the value of the rupee.
As our import bill is not very large as a proportion of GDP, so the rupee when appreciates does not help much in countering the inflation. Thus, a fall in the rupee value of our basket of imported goods can only have a small impact on the rate of inflation in the near future.
No comments:
Post a Comment