Disclaimer: This presentation is for educational

purposes only.
 Determination
of Exchange
Rate

Demand for Supply of

Foreign Foreign
Currency Currency
• https://pib.gov.in/PressReleasePage.aspx?PRID=1664831
• https://www.businesstoday.in/current/economy-
politics/remittances-to-india-to-fall-by-9-to-76-billion-in-
2020-due-to-covid-19-world-bank/story/420345.html
• https://www.theglobalfund.org/en/government/profiles/i
ndia/#:~:text=India%20joined%20the%20Global%20Fund,
of%20HIV%2C%20TB%20and%20malaria.
• https://pib.gov.in/PressReleasePage.aspx?PRID=1664831
• https://indianexpress.com/article/business/economy/resi
dent-indians-remit-record-18-75-bn-in-fy20-travel-
education-lrs-dominate-6411952/
• https://indianexpress.com/article/india/india-to-
contribute-22-million-to-global-fund-for-aids-tb-and-
malaria-5964091/
 D S

R E
Exchange Rate

S D

O Q Demand for & Supply of Foreign

Currency
 $1 = Rs.74

$1=Rs.76 $1=Rs.72
 $1 = Rs.74

$1=Rs.76

Happens through On the basis of

Government’s demand and
deliberate efforts supply =
= Devaluation Depreciation
• Let us assume that country is facing trade deficit.
• Depreciation or devaluation takes place at t1 (at a particular time).
• Immediately after a nation's currency is depreciated or devalued,
imports get more expensive and exports get cheaper, creating a
worsening trade deficit (or at least a smaller trade surplus).
• Shortly thereafter, the sales volume of the nation's exports begins to
rise steadily.
• Consumers begin to buy more locally-produced goods because they
are relatively affordable compared to imports.
• Over time, the trade balance exceeds pre-depreciation or pre-
devaluation times.
 J Curve
Trade Surplus

Trade
Balance
Trade Deficit

O t1 Time
Image: "Money" by Bru-nO, Pixabay is in the Public Domain, CC0
 Price of
Tariff (20%) Final Price
imported bike
Rs.20,000 Rs.1,20,000
Rs.1,00,000
 S
D

P E
Price

B N
P2
A L M
P1

S
D

O Q Q2 Q3 Q1 Demand & Supply

 S
D

P E
Price

B N
P2
Price Effect
A L M
P1

S
D

O Q Q2 Q3 Q1 Demand & Supply

 S
D

P E
Price

B N
P2
A L M
P1

S
Protective
Effect
D

O Q Q2 Q3 Q1 Demand & Supply

 S
D

P E
Price

B N
P2
Revenue Effect
A L M
P1

S
D

O Q Q2 Q3 Q1 Demand & Supply

 S
D

P E
Price

B N
P2
A L M
P1

S
Consumption
Effect
D

O Q Q2 Q3 Q1 Demand & Supply

Image: "Fix" by stevepb, Pixabay is in the Public Domain, CC0
 Advantages:
• Promotes International Trade & Investments
• Avoids Speculation
• Suitable for Small Countries
• Promotes Domestic Stability
• Stability in International Financial Market
• No Need to Lock Up Funds
• Promotes Regional Economic Co-operation
• Imparts Discipline in Formation of Policies
• Easy to Follow
 Disadvantages:
• Adverse Effect on Balance of Payment Position
• Problem of Liquidity
• Difficulty in Management of Exchange
• Not Necessarily Favourable for International Investments
and Lending
• International Fluctuations
• Correct Valuation of Currency is Not Possible
• Independent Internal Policies Not Possible
Image: "Reflect" by neotam, Pixabay is in the Public Domain, CC0
 Advantages:
• Ensures Balance of Payment Equilibrium
• Independent Economic Policies Possible
• No Need to Hold Large Exchange Reserves
• Natural Rate of Exchange
• Promotes Economic Stability
• No Hampering of Foreign Trade
• No Hampering of International Investment
• Shock Absorbing
 Disadvantages:
• Creates Uncertainty & Instability
• Discourages International Investments
• Encouragement to Speculation
• High Liquidity Preference
• Not Suitable for Countries having Weak Currency
• Poor International Co-operation
• Lack of Stability in Internal Polices
• Creates Inflation
Image: "Swing" by cocoparisienne, Pixabay is in the Public Domain, CC0
 D1
D S
S1
Exchange Rate

R E1 E2

D1
S D
S1

O Demand for and Supply of Foreign

Currency
https://www.ndtv.com/business/rupee-vs-dollar-rate-today-
rupee-surges-24-paise-higher-to-settle-at-73-07-against-
dollar-2346089
 BALANCE OF PAYMENTS ACCOUNT
Receipts (Credit) Payments (Debit)
1) Exports of goods a) Imports of goods
Trade Balance ( 1 – a)
2) Export of services b) Imports of services
3) Interest, profits and dividends received c) Interest, profits and dividends paid
4) Unilateral receipts d) Unilateral payments
5) Current Account Balance [(1 to 4) – (a to d)]
6) Foreign investments e) Investments abroad
7) Short term borrowing f) Short term lending
8) Medium and long term borrowing g) Medium and long term lending
9) Capital Account Balance [(6 to 8) – (e to g)]
10) Statistical Discrepancy (Errors & Omissions)
11) Overall Balance = Current Account Balance + Capital Account Balance + Statistical Discrepancy
(5 + 9 + 10)
12) Change in Reserves (+) h) Change in Reserves (-)
Total Receipts = Total Payments
 Country’s Balance of Payment Account (Rs. in crores)
Receipts (Credit) Payments (Debit)
I) Current Account Transactions
1) Merchandise Trade (goods exported) 200 1) Merchandise Trade (goods imported) 300
2) Services exported 100 2) Services imported 200
3) Income from foreign investments 200 3) Foreign payments from investments at 200
4) Unilateral receipts 100 home 100
4) Unilateral payments

Sub Total 600 Sub Total 800

II) Capital Account Transactions
1) Long term borrowings 200 1) Long term borrowings 80
2) Short term borrowings 100 2) Short term borrowings 60
3) Sale of gold or assets 100 3) Purchase of gold or assets 50

Sub Total 400 Sub Total 190

8) Errors & Omissions 10
Total 1,000 Total 1,000