Exchange Rate Inequality Case Study

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Exchange rate volatility and its impact: Case of India and China

 Exchange Rate
Exchange rate between two currencies is the rate at which one currency will be exchanged for another.
 How to calculate exchange rate
Each country manages the value of its currency through varying mechanisms. The currency can either be free-floating or fixed.
1. Movable or Adjusted Peg System
A system of fixed exchange rates, but with a provision for the revaluation (usually devaluation) of a currency. E.g. Between 1994 and 2005, the Chinese Yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. 2. Free Floating System
In this system the exchange rate is allowed to vary against that of other currencies. It is
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As of now there are only four currencies with that status namely- US Dollar, The Euro, Pound and Yen. China has been actively building on its 2005 reforms under it want the Yuan to be given Special Drawing Rights from the International Monetary Fund. But for achieving this it has to do lot of work. The first step has to be providing more information regarding the currency. The recent devaluation of currency is being looked upon as one such measure to satisfy the tough requirements of IMF. But the IMF says there is still a long way for Yuan to be included in the esteemed group of currencies. If Yuan is able to do so it would be able to control the prices of exports at its own will and hence wouldn’t have to worry much about how the other reserve currencies fare. This would help the economy to stabilize and hence grow at the desired…show more content…
The Indian Stock Market saw the biggest decrease in a day of 1600 points after 2008.A weaker Chinese currency will make imports from China an attractive deal in a wobbly World Market.

India Should Be Worried
With the rise in Dollar demand globally, including India, rupee has weakened as exchange rate is a function of demand and supply. With the yuan depreciating further the risk of Chinese goods being dumped in the Indian market at a price lower than the cost will increase, thus increasing imports.
Our imports from China have jumped to $60 billion in 2014-15, while exports have plunged to $12 billion, thus creating a huge trade gap which will only tilt further with the devaluation of yuan.
The fall in rupee reflects the negative impact on the Indian economy because of China.

Falling of rupee is bad

• Firstly, we may have to pay more at the pump as India imports 80% of its oil requirement, and a weaker rupee would only lower the effect of falling crude oil prices globally. Costlier petrol would knock up prices of most goods and thus increase

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