Basic about the Price Determination between Two Currencies Demand and Supply Mechanism which is left to market forces Gold bullion and reserves of each country and currency Stability in the country, regarding Inflation rate, Growth trend, Employment rate, etc.

Methods followed for deciding exchange rates Fixed (Gold Standard) Gold Specie Standard Gold Bullion Standard Gold exchange standard Flexible Float, market rate determined Mixed float Managed Flexibility

Difference between Devaluation and Depreciation Devaluation is a voluntary reduction of price of a currency as opposed to that of another currency Depreciation is a market-forces determined reduction in the value Devaluation is harmful and has disastrous effect in economy Depreciation can be temporary and can be harmful but not endangering

Reasons for Depreciating of Rupee against Dollar Balance of Payments – Current account deficit – Capital account deficit Interest Rate Differentials Fiscal Deficit Inflation

Reasons for Depreciating of Rupee against Dollar (contd.) Global reaons – High Imports (Gold, Crude oil) – Lower exports (price of our exports is less as compared to that of what we import) – Problems in Global Economy affecting trade and services

Recent reasons for depreciation in Rupee Value Against Dollar High Import of Gold and Crude Oil Capital Flight Due to Prolonged Inflation

Effects Heavy impact on Importers (oil manufacturers, Jewellery makers, etc.) Incentive for Exporters but short lived incentive(textile makers, software companies which have off-shore contracts with a clause of elevation in consideration) Students who go for abroad learning

Inshort, all exporters will get benefit from the sudden depreciation and all importers will have to pay more for the imports The effect of this on national economy can be that, the deficit will increase leading to a reduction in flow of capital and added inflation if not handled properly by RBI. The time horizon in case of floating economy is large, as market takes time for correction. This might even have serious problems in banking sector