Indian bank forex exchange rates

The German buyer supplies Euros which are converted into Rupees. These Euros become supply of Euros for India. When they want to spend in India they convert their income into Indian rupees, providing India with supply of foreign exchange. He supplies the income he earns in dollars to Indian banks when he wants rupees to spend in India. This financial investment by non-residents of India generates a supply of dollars.

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In figure 5. The Y axis denotes the price of 1 dollar in Rs. As shown we have a downward sloping demand curve for dollars. This implies that as the price of a dollar in Rs. This is the same logic that we use for any other good. The law of demand gives us an inverse relation between price and quantity of any good, represented as a down sloping demand curve.

A model as shown in figure 5. Also there is no limit on the exchange rate, in terms of how low or high it can be. The flexible exchange rate is dictated purely by demand and supply considerations. Economic and financial factors can affect exchange rate only through demand and supply forces. We must now understand two common words used with reference to foreign exchange.

Depreciation of domestic currency refers to an increase in the domestic price of foreign exchange. This means that every dollar now gets you Rs. Does this mean that Rupee has improved its value or has the Rupee value diminished? The answer lies in understanding that for every Re now we get fewer dollars.

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Since we end up with lesser dollars this is depreciation of the Rupee. In the same way an appreciation of rupee will mean that we get more dollars per Rupee. Consider another equilibrium rate of Rs. As we get more dollars with Rs. The exchange rate is also called the value of the currency, which is something we often see as newspaper headlines.

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When the value of Rupee rises we say it has appreciated, while depreciation means its value has fallen. The rise and fall in value of any currency is thus, correlated with the exchange rate. This flexibility can be seen through many cases that outline movements in demand and supply separately as well as in a joint manner. We now consider some such changes, using dollars as the foreign currency:. A rise in demand for dollars is shown as a rightward shift of demand curve from D1 to D2.

The new equilibrium is now at E2, where exchange rate is Rs. This may happen when imports rise and importers need dollars to pay for goods bought from abroad. This change is also called depreciation of the Rupee. An increase in supply of dollars is shown as a rightward shift of supply curve from SI to S2. The new equilibrium is now at E3, where exchange rate is Rs. This may happen when exports rise and sellers from abroad need to pay Indian exporters in Rupee terms.

This change from Rs. Simultaneous Increase in Demand and Supply of Dollars:. We now allow both demand and supply to change. This is shown by a simultaneous move from D1 to D2 depicting increase in demand for foreign exchange and from S1 to S2 depicting increase in supply for foreign exchange. Now there can be three possible cases as shown below:. Figure 5. This happens if increase in demand is more than the increase in supply. This is clearly shown as the amount of shift of D1 exceeds the shift of S1. This happen if increase in supply is more than the increase in demand.

This is happening as increase in demand is matched exactly by the increase in supply. The only effect is that quantity of dollars traded in the market increases as shown by the arrow under X axis. Thus we can see that the effect on exchange rate in a flexible exchange rate model depends on the relative change in demand and supply for dollars. This makes him happier as he realized more revenues without any change in goods sold.

So exporters benefit from depreciation. By the opposite logic, importers will lose. Let Shalini be an importer of designer bags from Italy. Importers lose out if rupee depreciates. This explains why nations that fixed exchange rate like to fix rates at a level that exceeds the rate determined in the market. Export earnings are higher in such a scenario. China did this for many years, until recently when it shifted to a flexible rate regime. In this case the supply of foreign exchange for conversion of dollars to Rupees will be higher than demand for dollars from Indians who want to convert Rupees to dollars.

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The fees can be quite low and sometimes even zero , but beware of the poor exchange rates which banks often apply.

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