What is Rupee Appreciation or Rupee Depreciation  ?

by

Rajesh Goyal   

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.  

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/- :

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

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