Opinion & Editorial
How does a rupee fall?
What's meant by the fall in Rupee? How's the Rupee-Dollar rate fixed? What's meant by this rate? The jargons like "Dollar-Rupee exchange rate" are nothing but it simply means how much money is req...
What's meant by the fall in Rupee? How's the Rupee-Dollar rate fixed? What's meant by this rate? The jargons like "Dollar-Rupee exchange rate" are nothing but it simply means how much money is required to buy a Dollar. Therefore, when we say that the Dollar-Rupee Exchange Rate is 60, it means that Rs 60 is needed to buy one Dollar. In other words, it means what the price of one Dollar is. "The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers", (Wikipaedia). Currency Trading is the world's largest market consisting of almost trillion in daily volume.
"All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. The first currency of a currency pair is called the base currency while the second currency is called the counter currency. The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency." (currency.com)
Now the question is: Who or what sets this price? The answer is Market Forces of Demand and Supply. These terms may seem like Chinese to a layman! Let me elaborate. Demand means the aggregate of something that's desired by the buyers of a certain place at a certain time. For example, say the current demand for Onions in Srinagar City is 500 tonnes. Supply means how much is available in market for sale, say 400 tonnes. Now, 'Market Forces' refers to the aggregate of all factors that influence the Demand and Supply. These forces may be Less Production of Onions, a rumour about a huge foreign investment, etc, etc. Now, to understand the effect of Market Forces over the Exchange Rate, let's carry on with our example of Onions. As is clear from our case, there is a gap of 100 tonnes between the Supply and Demand. If you've some onions on your shop, you may decide to increase the price for, the Demand is very good and there is a shortage of Onions! You may do good business out of it. Now, this will ultimately lead to an increase in the price of Onions because all onion-sellers will increase prices. The story behind the Dollar-Rupee exchange rate isn't much different.
There are many factors that lead to an increase or decrease in the Demand for Dollars. Let's take an example: 500 Indian students went to US for pursuing higher studies because US universities and colleges provide outstanding educational facilities. These students need to pay their fee, rent, etc in Dollars. Right? Because in US, dollars are accepted as money. Now, these 500 students demand Dollars. Similarly, say, many students from other countries too rush to US universities and colleges for pursuing studies. Will the demand for Dollars increase or decrease? Yes, it is going to increase. So, just like Onions, the price of the Dollars will increase. More money will be needed to buy US Dollars. This is how, on the basis of many factors, the price of a currency may rise or fall.
(Abrar Ul Mustafa is MBA, NET. He teaches at Greenland Business School, Hawal, Srinagar)