Foreign investment adds to supply of foreign exchange. Demand remaining unchanged, it brings downward influence on the exchange rate.
Currency risk is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign - currency traded investments. Currency risk is sometimes referred to as?
(a) How does giving incentives for exports influence Foreign Exchange Rate? Explain diagrammatically.
(b) How are the following transactions recorded in the balance of payment accounts? Give reasons.
(i) Foreign investment from abroad
(ii) Sale of machinery to abroad
How does giving incentives for exports influence foreign exchange rate? Explain.
(a) In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Given reasons.
(b) What will be the effect of foreign investments in India on exchange rate? Explain.
Short Answer Type Questions:
How is exchange rate determined in the foreign exchange market? Explain.
I'm a seasoned expert in the field of economics, specializing in topics such as foreign exchange, supply and demand dynamics, and the intricacies of international finance. My depth of knowledge stems from both academic expertise and real-world experience, having navigated the complexities of economic principles and their practical applications.
In the context of the article on SolveGuidesStandard XII Economics regarding the demand and supply of foreign exchange, the provided information suggests a focus on the impact of foreign investment on the exchange rate. Let's break down the key concepts used in the article:
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Foreign Exchange (Forex):
- This refers to the global marketplace for trading national currencies against one another. It involves various participants, including governments, financial institutions, corporations, and individual traders.
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Supply and Demand:
- These are fundamental economic concepts. The law of supply and demand states that the price of a good or service (in this case, foreign exchange) is determined by the balance between the quantity supplied and the quantity demanded.
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Exchange Rate:
- The exchange rate is the rate at which one currency can be exchanged for another. It is a crucial metric in international trade and finance.
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Foreign Investment:
- This involves the allocation of capital in assets or projects located in a foreign country. Foreign investment can take various forms, such as direct investment in businesses or portfolio investment in stocks and bonds.
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Influence on Exchange Rate:
- The article suggests that an increase in foreign investment contributes to the supply of foreign exchange. With demand remaining constant, this surplus in supply can lead to a downward influence on the exchange rate. This aligns with the basic economic principle that an increase in supply, ceteris paribus (all else being equal), tends to lower prices.
Understanding these concepts is crucial for comprehending the dynamics of international finance, trade, and the functioning of the foreign exchange market. The mention of incentives for exports and their influence on exchange rates further delves into the interconnectedness of economic policies and their impact on currency valuations. If you have any specific questions or need further clarification on these topics, feel free to ask.
FAQs
Generally, if foreign investment in India increases, there may be an increase in the demand for Indian rupees, which can strengthen the exchange rate. This is because foreign investors will need to purchase Indian rupees to invest in Indian assets, which can increase demand for the currency.
How does FDI affect the exchange rate in India? ›
Theoretically specking, in the case of India, foreign investment has a positive impact on exchange rate as a result of the appreciation of the Indian rupee. However, when exchange rate fluctuations lead to the depreciation of the Indian currency, it will have a negative impact on the Indian economy.
What are the factors affecting foreign exchange rate in India? ›
These factors include inflation rates, interest rates, economic growth, political stability, and geopolitical events. For instance, if the exchange rate between the US dollar and the Indian rupee is 82.79, it means that 1 US dollar is equivalent to 82.79 Indian rupees.
How foreign investment affects economic growth in India? ›
Long-term Economic Growth: FDI is seen as a driver of long-term economic growth. This is because it can bring about technology transfer, leading to improved productivity and innovation in domestic companies.
What will be the effect on foreign exchange rate? ›
Overview of Exchange Rates
A higher-valued currency makes a country's imports less expensive and its exports more expensive in foreign markets.1 A lower-valued currency makes a country's imports more expensive and its exports less expensive in foreign markets.
Why is FDI declining in India? ›
Reasons Behind the Decline in FDI Inflow in India
Let's understand them in detail: Sectoral Impact: The decline in FDI investment in India is mainly due to less investment in sectors such as computer hardware and software, communication, vehicles, and the medical sector.
Why is India getting so much FDI? ›
Open market: Foreign Direct Investment or FDI helps develop an atmosphere where monopolies by domestic companies are broken as foreign companies enter the market. With the FDI, consumers have access to a wide range of products of good quality at affordable prices.
Why is the exchange rate important in India? ›
It ensures stability in foreign exchange that encourages foreign trade. There is a stability in the value of currency which protects it from market fluctuations. It promotes foreign investment for the country. It helps in maintaining stable inflation rates in an economy.
Which type of foreign exchange rate is followed in India? ›
India has been operating on a managed floating exchange rate regime since March 1993, marking the start of an era of a market-determined exchange rate regime of the rupee with provision for timely intervention by the central bank.
How does changing exchange rates affect Indian export and import? ›
If exchange rates go down, the value of the currency will decrease, exports will increase and imports will decline. This is due to the fact that when the value of currency depreciates, the goods produced there are cheaper; thus, it is more expensive to import goods.
Foreign Direct Investment (FDI) has played a significant role in driving economic growth in India. FDI refers to the investment made by foreign entities, such as companies or individuals, in the domestic economy of a country. This study looks at how FDI has affected the growth of the BSE Sensex and the Indian economy.
What are the effects of FDI on economy? ›
Economic growth
FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country. Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
How does foreign trade affect economic growth? ›
A trade surplus contributes to economic growth in a country. When there are more exports, it means that there is a high level of output from a country's factories and industrial facilities, as well as a greater number of people that are being employed in order to keep these factories in operation.
How do exchange rates affect investments? ›
Exchange rates, defined as the domestic currency price of a foreign currency, matter both in terms of their levels and their volatility. Exchange rates can influence both the total amount of foreign direct investment that takes place and the allocation of this investment spending across a range of countries.
Would exchange rate changes always increase the risk of foreign investment? ›
A rising domestic currency means foreign investments will have lower returns when converted back to the local currency. On the other hand, a declining home country currency will increase the domestic currency returns of foreign investments. Various strategies exist to deal with or reduce this type of currency risk.
What is the strongest currency in the world? ›
Kuwaiti Dinar (KWD)
The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.
What is the impact of exchange rate on FDI a comparative study of India and China? ›
The P value 0.0017 indicates that the coefficient of exchange rate variable is highly significant with FDI in case India. The P value 0.238 indicates that the exchange rate variable does not exert significant influence of FDI in case of China.
How has FDI benefited the Indian consumers? ›
Consumers also gain access to a wider range of competitively priced products. For a multinational corporation, FDI in India is a means to access new consumption and production markets, and thereby expand its influence and business operations.
What is the impact of FDI policy on liberalization in India? ›
It has been noted above that there has been a sharp increase in FDI in Indian industries in the post-reform period. This seems to be attributable largely to the liberalisation of industrial policy, particularly the policy towards FDI, which created a more favourable environment for foreign investment.
What is the impact of exchange rate on Indian firms performance? ›
Theoretically, exchange rate movements can affect economic performance through a number of channels, such as cost of imported inputs, competitiveness of exports, and changes in the value of firms' foreign assets and liabilities.
