2. Definition:
Foreign exchange rate is the price at which one
currency can be converted into another.
It represents the rate at which a country may
exchange one currency for another.
3. Barter system:
• People exchanged services and goods for other services and goods in return.
• The history of bartering dates all the way back to 6000 BC. Introduced by
Mesopotamia tribes, bartering was adopted by Phoenicians.
• It was done through groups or between people who acted similar to banks.
• Advantage is that you do not need money to barter.
• Disadvantage of this system was that the other person does not have any proof or
certification that they are legitimate, and there is no consumer protection or
warranties involved.
4. History of currency in India
• The rūpiya—the silver coin weighing 178 grains minted in northern India by
first Sher shah suri
• silver coins as rūpyarūpa, gold coins (suvarṇarūpa), copper coins (tamrarūpa) and
lead coins (sīsarūpa)
• With the Paper Currency Act of 1861,These notes came along to be the first official
paper notes by a government in India.
• They came in denominations of Rs 10, Rs 20, Rs 50, Rs 100, and Rs 1,000, with
currency details in two languages, and a portrait of the queen.
• Bank notes with picture of Mahatma Gandhi was first printed in 1996.
5.
6. Devaluation of Indian currency
• Devaluation is the process of reducing a country's exchange rate in the
international market while keeping the internal value unchanged. This
was done to encourage an increase in exports and an increase in the
inflow of foreign currency.
• Why value of Indian currency declined against US dollar:
1. Lack of Fund in the hands of the Government
2. War with China and Pakistan
3. Political Instability and Oil Shock of 1973
4. Economic Crisis of 1991
7. • TYPES:
• Fixed rate:
A fixed exchange rate is imposed by a government or
central bank which ties the official exchange rate of the
country’s currency with the currency of another country.
• Flexible rate:
Flexible exchange rates can be defined as exchange rates
determined by global supply and demand of currency.
8. Factors:
• Inflation rates:
A country with a lower inflation rate than another's will see an appreciation in the value of its
currency. The prices of goods and services increase at a slower rate where the inflation is low.
• Interest rates:
Increases in interest rates cause a country's currency to appreciate because higher interest
rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a
rise in exchange rates.
• Balance of payment:
A country’s current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc.
• Government debt:
Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation.
9. • Terms of trade:
A country's terms of trade improves if its exports prices rise at a greater rate than its imports
prices.
• Political stability and performance:
A country with less risk for political turmoil is more attractive to foreign investors, as a result,
drawing investment away from other countries with more political and economic stability.
• Recession:
When a country experiences a recession, its interest rates are likely to fall, decreasing its
chances to acquire foreign capital.
• Speculation:
If a country's currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future.
10. NEER:
• The nominal effective exchange rate (NEER) is an unadjusted weighted average rate
at which one country's currency exchanges for a basket of multiple foreign
currencies.
• The nominal exchange rate is the amount of domestic currency needed to purchase
foreign currency.
• The NEER may be adjusted to compensate for the inflation rate of the home
country relative to the inflation rate of its trading partners.
11. REER
• The real effective exchange rate (REER) is the weighted average of a country's
currency in relation to an index or basket of other major currencies.
• The weights are determined by comparing the relative trade balance of a country's
currency against that of each country in the index.
• It is an indicator of the international competitiveness of a nation in comparison
with its trade partners.
12. NEER V/S REER
NEER REER
• A nominal exchange rate is essentially
the relative prices between two
currencies.
• It only describes whether a currency is
weak or strong, or weakening or
strengthening, compared to foreign
currencies
• It is an indicator of the international
competitiveness of a nation in
comparison with its trade partners.
• An increasing REER indicates that a
country is losing its competitive edge.
13. Foreign exchange market:
• The foreign exchange market is where currencies are traded.
• Foreign exchange markets are made up of banks, forex dealers, commercial companies, central
banks, investment management firms, hedge funds, and investors.
• One unique aspect of this international market is that there is no central marketplace for foreign
exchange.
• The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide
in the major financial centers of London, New York, Tokyo, Singapore, Paris and Sydney—across
almost every time zone.
