How the value of Rupee is Calculated

Sir, I want to know how the value of Indian Rupee is calculated in terms of any other foreign exchange? Like, these days value of 1 Dollar is crossing Rs. 66. Few months before it was around 55. Sir, Who calculates this value and how? thank you :)


MITHILESH from India

Mithilesh, the value of Rupee is calculated in world foreign exchange market like any other product. If I ask from you, how the value of onion is calculated. You will say in simple words that it is calculated in Vegetable Market on the basis of demand and supply of onion. These days onion price is Rs. 50 + per kg., few days ago its price was Rs. 10 per kg. When demand of onion is highest but supply is low, the price of onion jumped in Indian market. Like this, there is also big foreign exchange market where value of rupee is calculated on the basis of demand and supply of rupee. These days supply of rupee is highest but demand is very low, so price of Rupee against dollar is low. Few months ago, rupee's value against dollar was Rupee 1 = $ 0.02 or $ 1 = Rs. 50 but when demand of dollar is increased at highest level and demand of rupee has decreased, at that time, value of rupee has decreased upto Rupee 1 = $ 0.015 or $ 1 = Rs. 65. Following are the main factors which contribute for calculating the value of Rupee in international forex market.

1. Demand and Supply of Currencies 

See above my infographics. In this, there is total supply of dollar is 10,000. When there is zero demand and supply of dollar, there was $ 1 = Ru. 1 but when demand of dollars started to increase from one person to 4 persons, we see value of rupee started to decrease and value of dollar started to increase. So, when the demand and supply of dollar is equal at $ 10,000, exchange rate is fixed $ 1 = Rs. 50. Now, people became mad. They need dollar at any cost whether these are Indian or any other countries people. Now, in the forex market, the people who had dollars increased their dollar's value. So, other people who had rupees, started to decrease the value of rupee for getting one dollar. So, when the demand of dollar was $ 20,000 and supply of dollar is $ 10,000 at that time, foreign exchange rate of dollar had fixed $ 1 = Rs. 65. Now, if demand of dollar will reach $ 40,000 at fixed supply of $ 10,000, there will be more decrease in the value of rupee and forex rate of dollar and rupee will be $ 1 = Rs.130.So, both rupee's demand and supply powers and dollars demand and supply powers affect the calculation of the value of rupee.

2. Balance of Payment 

These days, you are listening in the news that Govt. of India is Pledging Gold for getting loan for paying his past debt which has increased due to unfavorable balance of payment. What a bad policy of Govt. of India!
It means, Govt. of India has increased his imports of useless things from USA and other countries and did not care to increase the export. Due to this, our balance of payment has became unfavorable. Now, Govt. of India is starting to Indian property whose name is Gold for getting new loan for paying past loan. It is foolish Idea for increasing the value of Rupee.

Dear students, we all know that when balance of payment becomes unfavorable, it means, we are unable to pay the credit which comes into existence due to borrowing (import) goods and services from foreign countries. At international level, reputation will go down. So, value of rupee will down in international forex market.

Let me explain it in my simple words. My friend came me for getting Rs.10,000 goods on credit. I gave. He promised me to pay within one month. But after 6 months, he did not pay my Rs. 10,000. His reputation in my eyes is zero. I will never give him any goods on the credit. But, if he is ready to pay advance  Rs. 40,000 for buying goods of Rs. 10,000, I will give him my goods. Same thing is happening with Indian Govt. Govt. of India is reducing the reputation of India with unfavorable balance of payment after independence. So, by decreasing the value of rupee, international forex market is just getting advance because when the value of rupee will decrease our taken loan will automatically increase with the same proportion.

3. Deficit Financing

If Govt. of India has not rupees in hand for paying foreign loan, then Govt. of India plays one more bad game of deficit financing. It means to issue of new notes. By increasing new notes means we are increasing the supply line. More supply of notes in the market will decrease the value of rupee.

Let me Explain it with simple example.

You are eating 4 chapati with vegetables. You supply 4 chapati when your body demands 4 chapati.  You will feel healthy with this because you supply on the basis of demand. Now, you want to increase your weight. So, one side, you did not increase demand of 20 chapati but you start to eat 20 chapati. What will happen. You will become ill because you have to increase the demand of 20 chapati first by doing hard exercises in gym, then you have to supply. Same thing is being done by Govt. of India and it is decreasing the value of Indian rupee.

4. Risk of Loss

When any investor who invests his money in India, he is interested to get reward of earning with any risk of loss. When he feels, the return on investment is very low and risk is very high. Other side, his country is giving more reward at less risk of loss, then he will withdraw all his money from India market. At that time, value of Indian rupee will decrease. Same thing is happening these days. Reason behind this - Corruption in India. When corruption will decrease, faith of foreign investor will automatically increase. So, the value of indian rupee will increase.

5. Import and Exports 

We are also responsible in this. When we demand foreign goods, imports will automatically increase. When imports the goods, we have to pay in USA Dollars. Due to negligence, we will increase the demand of USA dollar. If we start to buy domestic goods instead of foreign goods, rupee's demand will automatically increase and dollar demand will decrease. So, to fix the value of rupee is also in your hand. So, today, you should pass one resolution in your life - Be Indian and Buy Indian, if you want to save the Indian rupee from depreciation against US Dollar.

Related : How to Increase the Value of  Rupee