APPRECIATION
AND DEPRECIATION - ECONOMY
News: BJP govt responsible for rupee
depreciation against US dollar: Selja
What's
in the news?
●
Congress leader Kumari Selja blamed the
BJP-led Centre of being responsible for the continuous depreciation of the
Indian rupee against the US dollar due to its “wrong” economic policies.
Depreciation:
●
In the foreign exchange market, it is a
situation when domestic currency loses
its value in front of foreign currency.
●
In the floating exchange rate regimes, the
value of a country’s currency is determined by the market forces of demand and
supply.
●
A currency depreciates with respect to
foreign currency when the supply of currency in the market increases while its
demand falls.
Reasons
for Currency Depreciation:
●
Declining
exports leads to a fall in export revenues and thus the
demand for a country's currency reduces and it depreciates.
●
A large
increase in imports due to increased demand for imported goods can weaken
the exchange rate due to the net outflow of currency.
Appreciation:
●
In the foreign exchange market, if a
free-floating domestic currency
increases its value against the value of foreign currency, it is
appreciation.
●
Appreciation of currency takes place when
the supply of the currency is lesser than its demand in the foreign exchange
market.
●
If a government sells sovereign bonds, it
will lead to an inflow of foreign capital (say in $); thus the supply of $ will
increase leading to the appreciation of currency.
Reasons
for Currency Appreciation:
●
Current
Account Surplus can cause an inflow of foreign exchange
in the economy leading to appreciation in the exchange rate of the domestic
currency.
●
Increase
in exports can increase the demand for the domestic currency
leading to its appreciation with respect to foreign currencies.
●
Higher
economic growth can increase foreign investment in the
economy which can cause appreciation in the exchange rate.