Ansoff

Introduction

Before we talk about rupees appreciation or depreciation we need to understand what is Exchange rate?

In a simple word, how much one currency is worth in term of another currency? For example if we can buy $1 in 40, the exchange rate for the two currencies would be

$1 = Rs 40

There are two types of exchange rate: Fixed and Floating. Some countries have fixed exchange rate systems while some have floating. As the name suggests, the fixed exchange rate doesn’t fluctuate because of government intervention. The floating exchange rate, on the other hand keeps on changing continuously just like the stock market. Thus the government intervention is almost negligible. So, which type of exchange rate system does India have? In India, we have a Managed Floating Exchange Rate System. This means that the Indian government intervenes only if the exchange rate seems to go out of hand by increasing or reducing the money supply as the situation demands.

Let’s first see two very commonly used terminologies: Rupee Appreciation & Rupee Depreciation (instead of using the word ‘currency’ we are using ‘rupee’ for the Indian context and explain the fluctuation with respect to dollar). When rupee is said to be appreciating it means that our currency is gaining strength and its value is increasing with respect to dollar. However, when rupee depreciates it means our currency is getting weaker & its value is falling with respect to dollar. You can understand it with the following example:

Suppose, currently, the exchange rate is Rs. 45 = $1,

10 months later, either of the following two cases can happen

Case1: The exchange rate is say Rs. 40 = $1. This means rupee has appreciated or gotten stronger by approx. 11% and you would be paying less to for a dollar

Case2: The exchange rate is at Rs. 50 = $1. This means rupee has depreciated or gotten weaker by approx. 11% and you...