In such a scenario, the demand for the US dollar will increase since more dollars will be paid to the US while buying goods from them.Īnd from the Indian side, more dollars will have to be bought from Foreign Exchange Market to pay for these goods.Īs such demand for US dollars will increase as compared to the Indian rupee and hence their value. The demand for the US dollar is high since India is importing more products from the US than exporting. Since controlling the demand is barely in the hands of authority they influence the value of a currency by adjusting the supply of a currency in the market. As stated earlier, it is the supply and demand that determine the value of a currency. They do this by adjusting the supply of a particular currency either directly or changing some other factors. As mentioned earlier authorities of a country do intervene when they sense a bad time for their currency. The central bank of a country (RBI in India) also maintains a large reserve of foreign currency to deal with any kind of problems for Local currency in the Foreign Exchange Market. This bank represents a small unit in the huge Foreign Exchange Market. Currencies issued by different countries move through banks and it is here that most of the transactions take place.Ī person in Delhi having legal US dollar bills can get them converted to the Indian rupee at a particular exchange rate at a bank. Most exchange of currencies takes place at banks. Here, the value of a currency of a country is fixed with a particular currency.įor Example, a country decides to fix their currency value with relation to the US dollar and determines their currency at ⅕ of a dollar. There is another system of value determination of currencies, even though not as prevalent as the above one. Even though government or the central bank of the respective country does intervene when the currency destabilises or performs poorly.īut overall it is the mechanism of demand for a particular currency that determines its value. In this process of value determination, the government or authority of a country exercises no or little control. As the exchange of different currencies takes place in the Exchange market, the demand of each currency in the market determines its value. In this system, the value of a currency is determined by the basic economic concept of Demand and Supply.Ī currency with more demand has a higher value. In most countries of the world, the currency’s value is determined by floating exchange rates. How the value of a currency is determined? This means that if you want to buy a dollar from Foreign Exchange Market using Indian Rupee, you will need 74.12 rupees. Hence, the changing value of rupee remains a constant part of our everyday news.įor Example, the exchange rate of the Indian rupee in terms of the US dollar is approximately is 1 US dollar = 74.12 Indian Rupee. The exchange rate of any country’s currency does not remain constant but rather keeps changing. The exchange rate is the value of one country’s currency in relation to another country’s currency. The rate at which two particular currencies are exchanged is called the exchange rate. In simple words, one currency is traded with another currency at a particular rate. How the value of a currency is determined?įoreign Exchange Market is simply a global market where the trading of currencies takes place.
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