Question

Q.1. What is the relation between depreciation of domestic currency that is Indian rupee with the exchange rate of foreign currency? Q .2. What is the relation between appreciation of domestic currency with the exchange rate of foreign currency?

Answer 1

Dear student,
Under a flexible exchange rate regime the exchange rate is determined by the forces of demand and supply. Accordingly, the appreciation or depreciation of domestic currency is also dependent on the demand and supply of foreign exchange.
Appreciation of domestic currency takes place in the following conditions:

• Fall in the demand for foreign currencies with supply remaining same.
• Rise in the supply of foreign currencies with demand remaining same.

Depreciation of domestic currency takes place in the following conditions:

• Rise in the demand for foreign currencies with supply remaining same.
• Fall in the supply of foreign currencies with demand remaining same.