Transcript Gold, Crude oil

Basic about the Price Determination
between Two Currencies
• Demand and Supply Mechanism which is left
to market forces
• Gold bullion and reserves of each country and
currency
• Stability in the country, regarding Inflation
rate, Growth trend, Employment rate, etc.
Methods followed for deciding
exchange rates
Fixed
(Gold Standard)
Flexible
Gold Specie
Standard
Float, market
rate
determined
Gold Bullion
Standard
Mixed float
Gold
exchange
standard
Managed
Flexibility
Difference between
Devaluation and Depreciation
• Devaluation is a voluntary reduction of price
of a currency as opposed to that of another
currency
• Depreciation is a market-forces determined
reduction in the value
• Devaluation is harmful and has disastrous
effect in economy
• Depreciation can be temporary and can be
harmful but not endangering
Reasons for Depreciating of Rupee
against Dollar
• Balance of Payments
– Current account deficit
– Capital account deficit
• Interest Rate Differentials
• Fiscal Deficit
• Inflation
Reasons for Depreciating of Rupee
against Dollar (contd.)
• Global reaons
– High Imports (Gold, Crude oil)
– Lower exports (price of our exports is less as
compared to that of what we import)
– Problems in Global Economy affecting trade and
services
Recent reasons for depreciation in
Rupee Value Against Dollar
• High Import of Gold and Crude Oil
• Capital Flight Due to Prolonged Inflation
Effects
• Heavy impact on Importers (oil
manufacturers, Jewellery makers, etc.)
• Incentive for Exporters but short lived
incentive(textile makers, software companies
which have off-shore contracts with a clause
of elevation in consideration)
• Students who go for abroad learning
• Inshort, all exporters will get benefit from the
sudden depreciation and all importers will
have to pay more for the imports
• The effect of this on national economy can be
that, the deficit will increase leading to a
reduction in flow of capital and added
inflation if not handled properly by RBI.
• The time horizon in case of floating economy
is large, as market takes time for correction.
• This might even have serious problems in
banking sector