Rashika and Kanica were discussing about how the exchange rate between India and USA is rising day after day. According to you, what does rise in price of foreign exchange due to market forces of demand and supply mean?

Currency depreciation for India

The correct answer is Option 1: Currency depreciation for India

A rise in the price of foreign exchange means more rupees are required to purchase one dollar.

Example:

• Earlier: $1 = ₹75

• Now: $1 = ₹80

• More Indian Rupees are needed to buy the same 1 US Dollar

• Therefore, the Indian Rupee is losing value in comparison to the US Dollar

As, due to market forces, the price of foreign exchange has risen, we will call it as depreciation of Indian currency and appreciation of American currency.

Note: Change in the exchange rate due to market forces of demand and supply means appreciation/depreciation of currency. Whereas, when the change is seen due to intervention by the government is called as revaluation/devaluation of the currency.