Currency is anything that is used in any circumstances, as a medium of exchange and it is a synonym for the concept of money. Each country has its own currency (except in Europe where a group of countries have a common currency). The rate at which we can convert one currency into another currency is known as conversion rate between two currencies. This rate changes on daily basis depending on the demand and supply of each currency. When demand of foreign currency increases it gives the negative effect on home currency and it depreciates the value of home currency.
Major factors through which demand for foreign currency come from:
- Importers -who demand foreign currency to pay for the goods they purchase from abroad.
- Individuals -who go abroad to travel and get education.
- Foreign Direct Investments (FDI) — individuals or institutions that invest money abroad to carry on business operations there.
- Foreign Institutional Investors (FII) — individuals or institutions who buy foreign financial assets such as stocks and bonds.
- Speculation in currency market could also influence the price of the currency
Country could apply the following policies to improve the value of its currency
- More attractive policies to encourage the FDIs.
- If the $ reserve of the country is good then central bank could also intervene to defend its currency.
Effects of depreciation of any currency
All those who receive $ payments or income will get more home currency for same amount of dollars
- Exporter of home made goods and services
- Exports with low import content
- Individual with foreign income
All those who have $ obligation will need more home currency to buy the same amount of dollars.
- Importers of Oil, Gems& Jewellery and other also sustain losses
- Borrowers who borrow money from foreign
- Individuals who have to go foreign for education & business travels
- Overseas investors: Investors redemptions in particular country will be lower in dollar terms
- Consumers’ inflation would rise because fuel, cooking oil, pulses will become costly