Economics Basics: Part 2 : Rupee Vs Dollar

There, there. Petrol prices are going to come down by 1 or 2 rupees. That's good isn't it. But have you ever wondered why there is so much fluctuation in the price of the petroleum products. Well, simple reason as i discussed in last post (http://sscprep.blogspot.in/2012/09/economics-concepts-basics-part-1.html) its the same demand supply imbalance. As demand decreases price decreases and vice-versa is also true. Similarly if supply increases price goes down while it goes up if supply decreases. Common example the vegetables like carrot, fruits like mango which are cheap in winter and summer respectively and although you can get them anytime in the year their prices are higher on other occasions as supply is very little.

Applying this concept on currency, the higher the demand for any currency more expensive and dearer would it become and the lower the demand more cheap it will be. Thus when people start asking for Dollars it becomes dearer and rupee goes down and if demand for rupee is high the rupee would rally against dollar as dollar is not in demand.

Appreciation of currency: It means that the currency is in demand and thus would be dearer and expensive.So, if rupee appreciates against dollar that means rupee has increased and thus there would be less rupee in 1 dollar.

Depreciation of currency: It means that currency is losing and is not in much demand thus is cheaper. SO, if rupee depreciates against dollar it means now 1 dollar would buy you more rupees.

Lets take a simple example. Let today 1$ = Rs. 50.

Case 1 :Now if rupee appreciates by 1% it means that rupee has gained and thus dollar would be cheaper and hence it would buy less no. of rupees i.e. 1% less. So now 1$ =Rs. 49.50

Case 2 :Now if rupee depreciates by 1% it means rupee lost and thus 1 $ would buy more rupees i.e. 1% more. So now 1$ = Rs. 50.5

Same can happen with any currency, and thus the rates of exchange are based on the demand for that currency in that market. Now $ is generally used as standard as it is the most respected currency and is one of the most stable. Although now China is influencing other BRICS to use their own currency in business.

In next article I would discuss effect of this fluctuation on Indian economy and Oil companies.