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Rupee: a Testing Time for India Authorities

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Submitted By vivekviswan
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Rupee: A Testing Time for India Authorities
The currency of a country often reflects its economic, political, geopolitical strength of the country. The currency swings often capture the capital movement and investor appetite in a comprehensive way. With dollar remaining as the major foreign currency for foreign trade and foreign reserve, the developing countries have limited options to control their respective currency. This same was experienced by many developing Asian countries in the recent financial rout.
Determination of Exchange Rate and its Fluctuations Like other prices, exchange rate also changes with the changes in the state of market. Just as other prices depend on supply and demand, exchange rate also depends on the configuration of forces of supply and demand. However, two important facets have to be noted: (i) Unlike goods and services, foreign exchange has no direct cost of production. It has only opportunity cost (Walras.1874). Import bills have to be paid through export earnings. So cost of production of exportable surpluses may be taken to constitute the direct production cost of exports and indirect cost of imports (Aggarwal, R. (1981)). Opportunity cost is accounted by with drawl of exportable surplus from domestic consumption. Fluctuations are a natural characteristic of foreign exchange rate market, provided that the exchange rate is not an administered price. If exchange rate is an administered price, it is determined administratively by the central bank of the country. Administered foreign exchange rate is generally endowed with stability as both demand for and supply of foreign currency is under the control of central bank.

Exchange rate, on the whole, fluctuates like other prices, which generally varies with change in demand and/or supply. Imports, foreign aid, investment in other countries and remittance of profits abroad are the...

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