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Thursday, June 20, 2013

Rupee hits historic low ! ~ is 60 against USD - how Exchange rates get determined ?

The Rupee has hit an all time low !!   Bad news for the Nation as this inturn will lead to spiralling prices ~ good for those who are earning in foreign currency. 

There are lot of things which are too difficult for the common man to understand ~ the way price of petrol is fixed; that of gold ~ the craze for Gold and of course the value of rupees and how it gets fixed ?

There is the Exchange rate or the Forex rate the rate between two currencies ~ the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency. Understand that there are two main systems used to determine a currency's exchange rate: floating currency and pegged currency. The market determines a floating exchange rate in so much as a currency is worth whatever buyers are willing to pay for it.  Pure Demand and Supply mechanism !!.

While this is adopted by many economies, understand that India adopts a pegged or fixed system,  where the exchange rate is set and artificially maintained by the government. The rate will be pegged to some other country's dollar,  and here it is the U.S. dollar. The rate will not fluctuate from day to day.

Today, the  rupee on Thursday plunged by a whopping 130 paise to hit life-time low of 60 against the US dollar in early trade on the Interbank Foreign Exchange on strong demand for the American currency from banks and importers. The rupee had earlier hits its all-time intra-day low of Rs 58.98 on June 11.

The interbank market is the top-level foreign exchange market where banks exchange different currencies. It is a wholesale market through which most currency transactions are channelled.

With regards – S. Sampathkumar

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