What causes currency to appreciate or depreciate ?

 Exchange rate is the price of foreign currency in terms of domestic currency (rupee) i.e amount of domestic currency needed to buy one unit of foreign currency.


Let us understand what is currency appreciation and depreciation 


Rupee prices keep fluctuating all the time . Sometimes we need more rupees to buy one unit of foreign currency and some times we need fewer rupees to buy one unit of foreign currency.

This change in rupee price is known as rupee appreciation or depreciation

Rupee appreciation is when value of rupee increases (becomes expensive) .

Rupee depreciation is when rupee value decreases (becomes less expensive) and more rupees can buy one unit of foreign currency . This is known as weakening of rupee as now INR worth is less than foreign currency.


What causes currency to appreciate or depreciate ?

Like any commodity whose price is determined by its demand and supply , currency price is also determined by demand and supply of that currency in the International market.

When supply of a country's currency increases , value of currency falls as more currency is required to purchase another currency causing currency to depreciate 

Demand for a country's currency comes from its export of goods and services and foreign investment in the country.

supply for a country's currency comes from its imports of goods and services and its investments in other countries.

other major factors are Current account deficit/surplus , capital account flows , interest rate and Inflation.


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