No doubt, besides the fundamental theory of market forces of demand and supply which is also called as the price mechanism, there are more other factors like those of social-political, diplomatic and foreign policies of a country which play substantial role in the determination of the value of Indian rupees against US Dollars. On the contrary, with the fall in the demand for dollars, which is again driven by myriad factors, the value of rupees appreciates and that of dollars decreases. Consequently the value of Indian rupee falls down against the US Dollar (US$). That is why when the importers demand more of the dollars for the international payments than their supply, the rupee weakens vis-à-vis dollar.
The supply or earning of dollar comes mainly from the exports of goods and service and the inflow of remittances by the Non-Resident Indians (NRIs). Foreign Institutional Investors (FIIs) put their money in the stock market of the domestic market while Foreign Direct Investment (FDI) is the capital which is invested in the companies of the domestic country. The US dollar is also demanded for the Foreign Direct Investment (FDI). It is worth knowing that the US dollar is primarily demanded by importers and the Foreign Institutional Investors (FIIs). The rate of exchange of the rupee against the US dollar is determined by the demand and supply of the US dollar in our country. So when one currency appreciates the other currency depreciates.Įxchange rate determination process between the Indian rupee and US dollar Currency price is always stated in relation to another currency. If exchange rate changes to 1$ = 55, we say rupee has depreciated as 1$ can buy more INR. This is also known as weakening of rupee as now INR worth is less than foreign currency. Rupee depreciation is when rupee value decreases (becomes less expensive) and more rupees can buy one unit of foreign currency. Suppose exchange rate changes to 1$ = 50, we say rupee has appreciated as 1$ can buy fewer INR. This is also known as strengthening of rupee as now INR is worth more than foreign currency. Rupee appreciation is when value of rupee increases (becomes expensive) and fewer rupees can buy one unit of foreign currency. This change in rupee price is known as rupee appreciation or depreciation. Sometimes we need more rupees to buy one unit of foreign currency and sometimes we need fewer rupees to buy one unit of foreign currency. Rupee prices keep fluctuating all the time.
Currently price of 1$ = 53.74, which means 1$ can be purchased in exchange of 54.Įxchange rate tells us the value of domestic currency in relation to one unit of foreign currency.
amount of domestic currency needed to buy one unit of foreign currency. Exchange rate is the price of foreign currency (USD, Yen, Euro, Pound etc) in terms of domestic currency (rupee) i.e.
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