What is Rupee Appreciation or Rupee Depreciation ?
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We all know that 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 know as conversion rate between
those two currencies. Therefore, if I have Rs1,000/- with me
and I wish to get US $ by surrendering the above INR, I need to go to a bank or
an authorized currency dealers for this transaction. They will
convert my INR into US$ at that day's rate. Thus, it becomes
clear that there is a foreign exchange market where you can buy one currency in
lieu of another currency. The rate at which this happens is called
conversion rate. This rate changes on daily basis depending on the demand
and supply of each currency.
However, most of us, tend to confuse when we read that there is
a Rupee Depreciation as it has moved from Rs50 per US$ to Rs55 per US$.
A look at this change indicates value has increased but report reads that INR
has depreciated. Undoubtedly it is confusing. Let us try to
remove this confusion.
What is Rupee Appreciation and Rupee
Depreciation ? What is meant by Rupee Depreciation and Rupee Appreciation
Now we will try to understand what is appreciation and
depreciation refers to when we read such news on daily basis. Let us
assume that in case, you go to a bank and asks the bank that you intend to buy
US$100, please tell me what is the amount of INR you have to pay.
Bank informs you that you need to pay Rs 5410/-. This means you can buy
US$ @ Rs.54.10 per dollar. This is the selling rate of the said bank
for US $ for that day.
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Now after one month, you go to bank and again ask the bank
that you wish to buy US$ 100, and bank tells you that this time you have to pay
Rs.5490. This means you have pay more to receive the same amount of US $.
This means the local currency has depreciated.
This will be known as Depreciation of Indian Rupee. In
the above example, it is clear that value of INR has gone when compared to US$.
On the other hand, if the rate quoted by bank on second
occasion is say Rs. 5380/-. It will be considered as appreciation of
INR as this time you have to pay less amount to buy the same amount of US$.
What is the impact of Depreciation and
Appreciation of Rupee on Indian living in India. We are assuming that
initially the exchange rate of US$-INR is Rs.50/- :
DEPRECIATES (For example, when US$-INR moves from Rs.50/- to
If Rupee APPRECIATES (For example, when US$-INR moves from
Rs50/- to Rs 47/-
Imports become costly as for each USD we have to pay Rs5/- more
IMPORTS BECOME COSTLIER
Imports become cheaper as for each USD we have to pay Rs3 less
IMPORTS BECOME CHEAPER
Exporters will have higher revenue. For exports of each Dollar,
the exporter will get Rs 5 higher
EXPORTERS EARN MORE
Exporters will earn lower revenue. For exports of each dollar,
now the exporter will get Rs 3 less.
EXPORTERS EARN LESS
Indian Who Wish to Go on Holidays Abroad
For each dollar taken abroad for spending, the traveller has to pay Rs 5
more and thus his trip will become costlier
TRIP IS COSTLIER
For each dollar he intends to take abroad for spending, the traveller
has to pay Rs3 less and thus his trip will become cheaper.
What has been the trend of US$-INR in
2012 : The below is the monthly average conversion rate of 1 US$ into INRs:-
Year : 2012
The above shows that INR
has depreciated between January 2012 and August 2012. At the
beginning of 2012, the conversion rate was Rs51+ whereas in August 2012, it has
depreciated to Rs55+. Thus, now Indians have to pay more for all imports
like crude oil, gold etc. even if the prices of these goods in US$ had remained