On May 23rd, 2022, the rupee improved its position by .4 paise against the dollar. But, have you ever wondered how the rupee appreciation works and how it benefits the country?
So, today, let us discuss how the value of a currency is decided and its benefits.
Currency appreciation refers to a phenomenon where the domestic currency’s value rises against a foreign currency. Let’s take an example if 1 USD is purchased at Rs. 76 today, and it is traded for Rs. 74 tomorrow then we can say that rupee has been appreciated by 2 rupees against the dollar.
Now that you have an idea about how currency appreciation works. Let us jump into how these changes and fluctuation in price takes place.
How does currency appreciation work?
There are several factors that contribute to the rise and fall of the value of a currency. These factors are usually related to the factors that affect the economy. One of those factors is import and export in a country. When goods that are imported have high demand, it negatively affects the value of the rupee against the foreign currency. Whereas, when the demand for domestic goods increases in foreign markets, the demand for the Indian rupee also increases, resulting in a positive impact on the value of the money.
When more foreign currency enters India through exporting domestic products, it strengthens the rupee.
One another factor that contributes to rupee appreciation and depreciation is printing more money. If the government starts printing more money without supporting economic growth, the results are adverse like in Zimbabwe. In 1990, because of excessive printing of money, the local currency lost its confidence.
There are other factors, like macroeconomic policies, forex markets, etc., that affect the value of the rupee or any other currency.
Impact of rupee appreciation:
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When the rupee becomes strong, exporting becomes costlier and earns less profit for the local exporter.
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Therefore, domestic companies that highly rely on exports get affected by the increase in the value of money.
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The next sector that is hit majorly is the IT sector. Since their revenue majorly depends on exports.
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Stock markets also take a dip when the rupee is overvalued. There can be a bear movement in the stock market due to a fall in stock prices in the IT sector. It can also result in the entire market getting negatively affected by the overvaluation of the rupee.