Language Description | Forex Reserve & rupee’s exchange rate: What are they and how do they relate?

Dear reader,

In the last two years, and more so in the last two months, you have read or heard frequent quotes from the Indian treasury (short for exchange rates. Foreign countries) and the value of the rupee.

In the recent past, you have probably read about two Indian forex stocks the value of the rupee has fallen (as has the US currency). with the most.

Before one can understand the nature of these things and how they relate, one must abandon political stagnation.

Policy choices, not political choices or opinions

Many critics of the incumbent government have used the fall in the value of the rupee and the collapse of forex stocks to blame the economy of Prime Minister Modi. Are they justified?

If they were, would the likes of Mr Modi and his supporters agree when they used the same sentiment in condemning the UPA government in 2013?

Likewise, the past two years have been even better when India’s economy has been hit by Covid’s disease, supporters of the Modi government are familiar with: If the industry is bad, because what is the highest forex reserves of India?

[There was another retort — If the economy is so bad, why is the Sensex rising so fast? — but that is a story for another day]

Now that forex stocks are declining, would government supporters say the industry is booming (although not really)?

The idea: The height of forex stocks and the price of the rupee are policy choices and they are not guided by the ideological position of any political party.

They don’t have to, as you’ll notice at the end of the piece.

What is the value of the rupee?

If India were the only country in the world and if India did not trade with any other country in the world, these ideas would be meaningless. In other words, both India (that is, Indians and businesses) trade closely with other countries in the world. “Trade” refers to various forms of activity such as Indians importing U.S. goods (say computers), Indians exporting goods (say mangoes) to the US, a US company operating the services of an Indian software company, India allows a US bank to open its. members in India, wealthy Indians buying property in the US, and wealthy Americans investing in the Indian stock markets and so on.

Nowadays, every work is sought out and sold to Indians (rupees only). Likewise, they made Americans (only a few dollars) find and buy rupees.

Now, consider the beginning, for every rupee demanded in the market, there is a demand for a US dollar. The purchase price between the two currencies is 1.

But if money were demanded in front of the rupee ahead of time (because more Indians imported from America than were imported by Americans) From India, then the currency will appreciate the rupee.The price of the currency with the rupee will change from 1 to (say) 10.

If this trend continues, the rupee will continue to be weaker and weaker and its value will continue to fall (say, to Rs 50 per dollar).

Now that this is happening, those Indians who are importing things from America are very angry, because, every year that passes, the rupee buys an American product (i.e. priced in US dollars).

But those Indians who release things (say, mangoes) to the US will enjoy this “reduction” in the value of the rupee. Why? As the rupee depreciated, Indian mangoes were cheaper and better for American consumers. This often leads Americans to buy more mangoes from India against another competing country (Pakistan says).

Where and how do forex stocks fit into this picture?

In a free trade arrangement, the price of the rupee will change depending on the relative demand for the rupee between the United States (or others) and the demand for currencies between of Indians.

In other words, Americans are demanding more rupees (say because they want to import into India given the high growth rates) than the rupees demanded by the United States. Indians, the value of the rupee will be appreciated. When changed, the value of the rupee will decrease.

If that demand changes significantly, then, in theory, the value of the rupee will actually change.

Drastic and constant changes are destroying businesses.

Suppose an Indian importer who places an order to buy a property for only $ 100 finds out that at the time of payment, the exchange rate has doubled. At the business level, small businesses can melt a business. Even at the same level, students preparing to study in the US will say it can have a big impact. The depreciation of the rupee could make their research program impossible or insignificant.

Likewise, consider someone living and working in the US who returns $ 1 lakh to your family in India, with the expectation that the purchase price will give their family 70-times the amount (Rs. 70 lakh), but the price only appears to have changed. the rupee is so strong against the money that their family earns only 60 lakh.

This is where the RBI and forex come into the picture.

For a growing economy like India, which is trying to build its business by developing a niche of its own in the global market, the stock market doesn’t have to appreciate a lot of hurting investors. Indian customer.

Now, perhaps in a year, foreigners demanded rupees more than the currencies demanded by Indians. That is, there are more currencies compared to rupees in the forex market. Without the RBI, the rupee has appreciated / become stronger. But it will hurt the interest of consumers in India.

So what the RBI does is buy extra money from the forex market using the rupee (it can hit). This change reduces the availability of currencies and increases the availability of the rupee in the forex market, thus preventing the rupee from gaining strength (or appreciation) against the currency.

What is the impact on the funds the RBI buys? They have become the forex market of India.

False pride and false anger

In other words, when India’s forex stocks are booming, what is the jingoistic lot – who wants the rupee to appreciate or be strong against the currency – doesn’t know that stocks are rising forex is the source of India’s currency. It is not stronger than money. If the RBI wants, it can allow the rupee to appreciate the currency by not entering the forex market.

Likewise, those who blame the RBI and the government for mismanaging the industry simply by arguing that the rupee will depreciate with the currency, they are not sure how. the so -called weak rupee benefits Indian consumers and how strong the rupee is. to hurt India’s attempts to become a global production center.

Here is a guide to find out about the country with the highest forex reserves in the world: China.

What is China doing?

See TABLE below (Source: World Bank). It offers “Total Reserve minus gold (in current US $ terms)” for a selection of countries like India. Understand how China manages forex and how much of them outperform most development companies.

The table shows the amount of savings (less gold) for different countries, including the US and China, compared to India. (Source: World Bank)

What does this indicate? China has eliminated foreign currencies from the forex market and therefore allows its currency to remain weak (or weak) or at the very least, to prevent it from becoming too strong.

Why would China do that? Because he wants his products to be released in the global market.

Has this project been successful? Yes. Did this come at a price? Yes. Remember all the stories you read last year about the US, that is, accusing China of financial fraud.

The idea is not to argue that India should cheat its money. The idea is to understand the relationship between the level of forex investment and the value of the rupee.

What does it mean to earn forex if it keeps the rupee from appreciating?

Many believed that when Mr Modi came to power, the rupee would improve to 40 dollars. Some of them might argue that if high forex stocks are preventing the rupee from reaching that high then what is the reason for the availability of forex?

As explained, a major reason RBI enters the forex market is to control price volatility. Wild changes – on both sides – are disastrous and destroy confidence in the country’s currency.

But the other main reason is planning.

Consider an example where India is at war and it can’t let go of everything it has done normally for 4 months. In other words, all the money came to India because the payment for those exports did not come.

However, because India could not release it, it did not mean that India’s interests were lost. Oils or other raw materials such as steel and fats may be added. Where does the money come from to buy those importers?

That’s where forex stocks come in handy. That’s why when talking about forex stocks, we often hear about the number of months they cover land imports (called “cover”). cover “).

The end: Instead of looking at the movement of the forex and the rupee from a jingoistic warped lens or through the bursting glass of stability on different political sides, one needs to understand two things: One, broadly speaking, for an economy like India, a rupee will weaken slowly. it is a valuable asset and, therefore, desirable. Second, there are two parts to the number of forex stocks: cleaning up fluctuations in the trading price and providing an investment cover. Simply collecting forex stocks is not an effect in itself; It is not the ultimate measure of economic success and it is not something that can come without a price.

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Udit