Search

How is the value of the rupee decided with respect to the dollar?

Updated: Nov 18, 2019


Once upon a time, there were three countries. A, B and C.



When they established they were all self-sufficient. They all were producing rice, vegetables, bricks, and clothes required for all their inhabitants. Everything was going great.

Now, Country C found a new, faster way to make bricks. Thus, they started producing faster than the villagers there could buy. So, they thought they could sell some of them to Country B as it was going through a rainy season. In return for the bricks, Country B thankfully gave some extra rice. Country C was willing to offer only one extra brick for every 10 bags of rice they will receive from Country B.

Meanwhile, Country A was going through a drought season went to Country C for help so that they can receive bags of rice from them, in return for rice Country A offered the large pile of clothes to Country C.

The exchange process became complex and Country C decided to set a common thing (Currency) for exchange. Country C sets 1 brick equals 1 Currency C. Thus, Country A and B need to get Currency C to buy stuff from C.

Not to be left behind, Country A and B gave the names to their currencies and Currency A and Currency B.

1 Currency A is set as 10 pairs of clothes 1 Currency B is set as 10 bags of rice.

These currencies then used among the villagers to buy and sell stuff among themselves. At the current rate:

1 Currency A = 1 Currency B = 1 Currency C -- Equation 1.

It’s party time for Country C guys as they are getting a lot of, clothes and rice without working much. So, Country A and B guys keep working hard, Country C guys start relaxing more.

The drought in A ends and they start producing a lot of rice. Now, they are not in that need for the rice from C and have a less need for Currency C. As rice is required less, Country A guys are willing to offer only 5 clothes for every 10 bags of rice. By previous equations, now 1 Currency A (10 clothes) = 20 bags of rice = 2 Currency C.

In the meanwhile, Country B has adopted a part of the brick building process and have started producing enough bricks. They are now less willing to buy bricks from C. They now set 1 Currency B(10 bags of rice) = 3 bricks = 3 Currency C.

This leaves the Country C with no options but to devalue their currency to accept the reality that 1 Currency C = 0.5 Currency A = 0.33 Currency B.

This spurs the local farmers and weavers who can no longer buy rice and clothes from outside and start getting back to work again.

Today 1 US Dollar = 72.10 Rs. | You can now imagine the journey. Why? because India is a net importer and we produce less and import more.

Have you ever encountered what India actually imports and exports majorly?

India’s Major Imports:

  • Gold imports declined 2.8 percent year-on-year to $2.3 billion.

  • Oil imports increased 56.6 percent to $12.7 billion from last year.

  • Import of pearls, precious and semi-precious stones fell 17.1 percent to $2.7 billion.

  • Coal, coke and briquette imports rose 26.9 percent to $2.2 billion.

  • Imports of machinery, both electrical and non-electrical, rose 32.8 percent to $3.2 billion.

India’s Major Exports:

  • Petroleum products’ exports grew 52.5 percent to $4.1 billion.

  • Exports of organic and inorganic chemicals advanced 30.3 percent to $1.7 billion.

  • Engineering goods’ exports grew 14.2 percent to $6.7 billion.

  • Drugs and pharmaceuticals’ exports grew 14.7 percent to $1.5 billion.

  • Exports of readymade garments fell 12.3 percent to $1.3 billion.

  • Gems and jewelry exports’ increased by 2.7 percent to $3.5 billion.

-----------------------------

Note: Devaluation is essentially recognizing that one's currency is significantly less than what it used to be. This happens when a country is not letting its currency trade in the markets and essentially sets how much its currency is set to a dollar or other currency.



Thanks!!!!

Akshay Seth

invest@equityboxx.com | Linkedin (Connect here) Get daily stock recommendations here Learn Stock Fundamental and Technical analysis here

Open Free Demat account: Open here






1,318 views
  • LinkedIn Social Icon
  • YouTube Social  Icon
  • Facebook Basic Square
  • Twitter Basic Square

© 2016 by Equityboxx | ©equityboxx |  info@equityboxx.com | +91 8920161884 | SEBI Regd. INA000010122