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What is the flexible exchange rate? Explain the factors that lead to the appreciation and depreciation of the Indian rupee in terms of the dollar.
Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of theRead more
Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of the country.
The value of currency can fluctuate because of the market forces such as supply and demand forces in the market.
Appreciation of the Indian rupee in relation to the US Dollar means the rupee has become stronger against the dollar. We can buy more dollars with rupees than before.
Factors leading to appreciation are as follows:-
1. Increase in the value of Indian Rupee related to the US dollar.
2. Rupee becomes stronger against the dollar.
3. Eg.The value of 1 US Dollar decreased from ₹75 to ₹70.It means now we can buy $1 with ₹70 for which we used to pay ₹75 before.
Depreciation of the Indian rupee is the opposite of appreciation of rupee.In this the Rupee becomes weaker in relation to the US Dollar, we will get less dollars with rupees now.
Factors leading to depreciation of the Indian rupee are as follows:-
1. Decrease in the value of Indian Rupee related to the US Dollar.
2. Rupee has become weaker against the dollar.
3. Eg. The value of Doller has increased from ₹70 to ₹75. It means earlier we used to pay ₹70 to buy $1 but now we have to pay ₹75 for the same.
The appreciation and depreciation can be caused by many different factors such as Trade balances, inflation rate, political instability, export-import, interest rates, foreign investment etc.
See lessAppreciation of rupees leads to increase in purchasing power of Indian consumers but negatively impacts export and import of the country whereas depreciation benefits the export-import.