Currency evaluation is very crucial from an economic viewpoint. The currency is believed to be the backbone and lifeblood of the economy of a nation. The economy is affected when anything happens to its currency. Although money is not an organic being, still its value varies with the society and its economic condition.
Be it the look or the purchasing power, the value of one Rupee in 1947 was quite different from one rupee today. The Indian rupee which was at par with the American currency i.e. USD then is now hovering around INR 72.00 against it. Our currency i.e. INR is experiencing large volatility in recent years.
Currency evaluation depends on a lot of factors that can affect the economy. Some of them are trade, inflation, employment, interest rates, growth rate, and geopolitical conditions, etc. The volatility of a currency can seriously affect the economic growth of a nation. Currency evaluation has become a national priority, a state of emergency, which impelled everyone one of us to think seriously. Hence, we must know some fundamental concepts relating to the valuation of currencies.
Except for someone living in a cave on an undiscovered island, everyone uses currency or money. Each country has its currency. For examples: United States of America’s official currency is US Dollar or USD, Japan’s official currency is Yen, like that we have our rupee or INR. In Europe, a group of countries has a common currency i.e. Euro.
Meaning wise speaking, any form of money (coins, paper notes) that is in public circulation is called a currency. It is the ‘legal tender’ i.e. legally permitted to be used to obtain goods and services in a particular country. It is the medium of exchange, the basis for trade.
The ability to convert a currency to the value of any other currency is known as currency convertibility. It can be of three types, such as:
A currency is fully convertible when there is no restriction or intervention from any government or regulating authorities on its trading. For example, USD
A currency is partially convertible when there is a central bank or government intervention. And they control the investment inflow and outflow of a nation. For example, INR
These are the currencies, which are not allowed to be converted internationally. Even they can not be converted by any individual or company in any manner. For example, Cuban Peso and North Korean Won, etc.
In every country, there is a foreign exchange market. The foreign exchange allows us to buy and sell different currencies. And the demand for different currencies is not equal. The rate, at which one currency retrieves another currency is popularly known as the conversion rate. Every day the conversion rate changes, according to the demand and supply of currencies.
Currency appreciation and depreciation:
Currency depreciation or weakening is the loss of value of a country’s currency to one or more foreign currencies. An improvement or strengthening in the value of a currency, on the other hand, is known as currency appreciation.
Causes of currency appreciation:
The value of a currency appreciates when there is an increased demand for that particular currency. The chief reasons behind this are, when:
- A country’s exports are high, and buyers of those exports need the exporter’s currency to pay for their imports.
- Better employment and higher per capita income, etc. in a country elevates the demand for its indigenous goods and services in its local market. And it results in enhancing the urge as well as the value of that country’s currency.
- The country’s central bank raises interest rates with a perspective that there will be higher domestic savings in pursuit of higher interest rates.
- The demand for the currency is pretty high in the foreign exchange market.
Causes of currency depreciation:
On the other hand, currency value depreciates for the following reasons, when:
- There is a persistent adverse balance of trade and payments.
- There is a prolonged state of hyperinflation.
- There are heavy but cheaper imports.
- There is an excess supply of exportable goods and foreign demand for the goods is highly price elastic.
AUTHOR: SRIBATSA PATTANAYAK
EMAIL: [email protected]