Table of ContentsDevaluation of Rupee..................................................................................................................................2

1. Introduction.........................................................................................................................................2

2. Meaning of devaluation of Rupee.......................................................................................................2

3. How currency value is determined?....................................................................................................3

4. Major Factors Influencing the Currency Value....................................................................................4

5. Why any country would want to keep its currency value low?...........................................................9

6. Why RBI intervene on Currency valuation?.........................................................................................9

7. Impact of currency devaluation/ Weakening Rupee: Good for NRIs, Bad for Indian Economy..........10

8. Rupee depreciation benefits some but not good for the Indian economy........................................11

Devaluation of Rupee

1. Introduction

The past few months have been disastrous for the rupee value against dollar currency.Rupee’s value hit a terrible low on 13 December 2011 against the Dollar, falling to an alarming Rs. 53.22 per dollar. It has

depreciated about 17% from the early August levels ($1 cost Rs. 44.0749 per Dollar on 1st August 2011). This kind of devaluation would have drastic impact on the macro economy of the country like heavy raise in the import cost where countries like India heavily depends on the importing on Oil and other crucial raw materials needs for the industries.

2. Meaning of devaluation of Rupee

Let’s replace rupee with eggs. Today, one USD can buy 45 eggs. Tomorrow, 1 USD can buy 52 eggs. Doesn’t this means that eggs have become cheaper since you can buy more eggs for the same one USD? Alternatively, it means that eggs have depreciated in value.

The same is true for the rupee. When one USD can buy 45 rupees today and 52 rupees tomorrow, it means that the value of the rupee has depreciated.

In other words, we can say that when a currency loses value in the world market, depreciation

occurs. Rupee is the Indian currency. Just like any commodity the Rupee also has a price, the value you pay to exchange a rupee. The US Dollar being the predominant currency, all prices of currencies are generally quoted in Dollars. Hence in case of the Rupee, its price at any point in time maybe say, Rs.50 for a dollar. When the rupee becomes dearer i.e. say Rs.40/$ it is said to have Appreciated (Value) in the reverse case say Rs.50/$ then the Rupee Depreciates (Value).

3. How currency value is determined?

There are many factors to decide the currencies values but that could be very difficult for the common

man to understand the theory. In the simple words it is explained why the currency value is often

fluctuated. A currency will tend to become more valuable when its demand is higher than

supply. A currency will tend to become less valuable when its demand is less than supply. It

is the basic theory. We need to understand in the global economy terms, when the currency will have

more demand and when it will have less demand.

In a nutshell, we can say that Currency follows the concept of demand and supply. Depreciation is caused when the supply of the currency circulated in the economy is more than the demand for that currency. Likewise if the supply of the currency is less than its demand, the value of the currency increases or appreciates.

In today's world, most currencies 'float'. The exchange rate between any two currencies fluctuates from day to day and throughout the day. The exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. . Exchange rates for such currencies are likely to change almost constantly on financial markets, mainly by banks, around the world. Therefore, we can say that, exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries.

Is the currency backed by gold or not?

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is to one degree or another regulated by the gold supply. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India.

In what conditions RBI would print currency?

RBI would print currency in 2 conditions. Firstly, when the notes are mutilated or soiled it would print the currency. Secondly, when it wants to increase liquidity in the market/economy. RBI would initially lessen the interest rates so that liquidity in the market increases but even then if the situation is not controlled then RBI will use its cash reserves and would want to inject them in the market to increase the liquidity. Now, RBI will buy bonds from banks using its cash reserves and thus will be injecting more money / liquidity into the market.

Even then if there is a need for RBI to print more currency then it has to maintain gold or forex reserve in proportion to the amount of printing money. If they have sufficient reserves its fine or else it has to borrow gold or forex from World Bank. Now, this loan from World Bank will be shown as deficit in our Balance of Payment since it needs to be paid back.

4. Major Factors Influencing the Currency Value

A range of factors influence the exchange rate of any two currencies or the underlying supply and demand. None of these factors on their own determine the exchange rate. It is a complex mix of these and their effect on the perceptions of foreign exchange dealers and investors that will ultimately determine the rate.

These factors include:

4.1 InflationAs a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners.

4.2 Differentials in Interest RatesInterest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates.

4.3 Current Account DeficitsThe current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning.

Current account deficit would also mean it is borrowing capital from foreign sources to make up the deficit. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.

Therefore, we can say that current account deficit occurs when a country’s total import exceeds the total exports. This makes the country, a net debtor to the rest of the world. A high deficit indicates, we are doing more trading outside the country than its actual earning inside the country. This is not good for the country because, the country needs to buy more foreign currency. More demand for the foreign currency will reduce the value of that country’s currency.

4.4 Dollar is in Demand

Currency also follows the concept of demand and supply. Depreciation is caused when the supply of

the currency circulated in the economy is more than the demand for that currency. Likewise if the

supply of the currency is less than its demand, the value of the currency increases or appreciates.

BRIC countries like India have emerging economy, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing and many of them are on the verge of breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong on all statements, so to recover losses in their country, they are pulling out their investments from India. Due to this pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is raising up and rupee is depreciating.

Heavy dollar demand from importers and oil refiners is one of the reasons why rupee is depreciating. The crude oil prices are increasing which are in turn appreciating dollar as demand for dollar is increasing…

4.5 Collapse of International Trade

If we observe in terms of international trade, commodity prices are crashing at international level. One can observe uncertain Economic Situation around the globe.

The fall of the Indian Rupee was started initially owing to the European debt crisis which led to withdrawing of foreign investment from the Indian market in order to manage the liquidity crisis in their markets. The markets all over the world crashed and the Indian stocks were no exception to the volatile situation. Hence dollars are moving out of Asia which has depreciated rupee.

FII's turning Net-Sellers and withdrawing funds from the Indian Market. In uncertain times, investors prefer to cash over risky financial assets such as stocks, global sell-

off in stocks has increased demand for dollar and led to its appreciation...

4.6 Relaxing caps on ECB, FII etc. In the recent times India has opened doors for debt capital by relaxing caps on ECB, FII etc. Coupled with interest rate differential between India and developed world, there was tremendous increase in the external debt in India. India's overall external debt outstanding as of June-2011 was $317 billion, an increase of 38 per cent in last two years. The short-term external debt increased at a much faster pace of 62 per cent (in absolute terms) during the same period and it now constitutes about 21.6 per cent of total external debt. One worrying factor is that much of the debt is maturing in next one year. Due to re-capitalisation needs of European banks, it is likely that these banks will be less forthcoming in refinancing Indian corporate debt. All this is pushing pressure on rupee and has increased demand for dollar which is depreciating rupee.

4.7 Stock market performance It is a known fact that Indian stock market is dominated by overseas investors. When the economy is performing well and stock market is performing better than other countries, overseas investors will become heavy investors here. To invest here, they require rupee. This will increase the demand for rupee and will result in higher value for rupee. On the other hand, when these investors are pulling money out of Indian stock market, rupee will be depreciated. Indian markets are in a bad shape for the last 1 year. The sentiments after the US downgrade and the European crisis etc. resulted in overseas investors selling in India and buying dollars.

Very high prices for gold have created panic among investors and fearing a bubble there, investors started moving towards dollar. This demand in dollar is also causing depreciation of rupee.

4.9 Public DebtCountries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.

In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country's debt rating (as determined by Moody's or Standard & Poor's, for example) is a crucial determinant of its exchange rate.

4.10 Terms of TradeA ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country's exports rises by a greater rate than that of its

imports, its terms of trade have favorably improved. Increasing terms of trade shows greater demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's currency (and an increase in the currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease in relation to its trading partners.

4.11 Political Stability and Economic PerformanceForeign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to havnhbe more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese Yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the Yuan were floating).

4.12 Transaction demand for money The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

4.13 Speculative demand of the currencyThe speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).

Speculation may also play a part in influencing exchange rates especially of smaller economies where buying or selling huge volumes of the currency can have a marked if temporary impact on the exchange.

5. Why any country would want to keep its currency value low?Some economists argue that a country will intentionally keep the exchange rate low so that buyers on the world market will not purchase the Yen for example. You would think that a weak national currency would indicate that this country is poor. Not always the case (China is a good example), the argument is that nations like Japan and China want their currency to be low in value so that other nations (like the US) will buy more Japanese and Chinese products imported. Think about it, if the US dollar is twice as

strong as the Yen, than it can buy twice as many Japanese goods. If a computer costs 1,000 dollars in the US, but 1000 Yen in Japan, than you could buy two Japanese computers.

6. Why RBI intervene on Currency valuation?

We have seen RBI has acted to stop the erosion of rupee value against the dollar currency. What it

did was sold the dollar currency in the market to increase the value of rupee. But, it is very

difficult for the Reserve Bank of a country to adjust the value of the currency, the long term solution

would be fix the problem in economy and bring the inflation into control. One would wonder

why RBI has to intervene on currency value decrease or increase. Note that, RBI would not allow

currency to be higher after certain level because of the exports would get affected like IT

companies would suffer if the rupee gets appreciated against the dollar.

India is heavily dependent on the import of raw materials and Oil for its industrial

development. In the decreasing rupee scenario, the outgo of money will be much higher.

This would affect the expenses for the companies who imports raw materials for their factory and all

the Oil Marketing Companies (OMC) will incur heavy payment to import the Oil. Now it should be clear

why the Petrol prices have been increase in the last fortnight. Hence, the reason the increase in oil

prices in our country was the depreciation of rupee value against dollar.

Fiat Currency

All modern monetary systems are based on the principle of fiat currency. This means that the value of money is derived not from any intrinsic value (as if it were made from precious metals) or the promise to redeem them for a set amount of precious metals but because the government dictates that it must be accepted as currency. The value of money is set by a mixture of what the government says it should be and what private and public speculators say it should be.

The Government

The government issuing flat currency takes the primary responsibility in setting its value. When a government prints fiat money, it is acting as a creditor in the sense that it promises the money is worth something. If a government does not back the value of its currency through an appropriate level of taxation, the money loses value. This is why budget deficits, national debts and central bank interest rates have an impact on what a currency is worth. Strong backing on the part of the public, strong economic performance and a healthy private banking sector can all mitigate this, however.

The Market

In the modern world economy, currency itself is treated as an investment commodity. The result is a speculative market where investors migrate between currencies seeking the convert capital into the best haven for their investment. This can cause a nasty feedback loop. A government with a weak economy, weak banking system or high budget deficits (or any of the above factors) will see the value of its currency erode vis-a-vis other currencies. This will cause money speculators to bet against it, driving it further down. The example of the sharp decline in the value of the dollar in 2007 and 2008 were good examples. Market speculation compounded the triple problems of weak economic performance, banking sector scandals and high budget deficits to produce a worldwide crisis in confidence against the U.S. dollar, driving it to records lows against most other major world currencies. This reflected the flight of private investors and foreign treasuries away from the dollar as the currency of choice

7. Impact of currency devaluation/ Weakening Rupee: Good for NRIs, Bad for Indian Economy

7.1 Good news for NRIs The rupee is falling. And it is good news, as usual, for the NRIs, who are in the habit of remitting money to India. This works well for the salaried class who can now send more money to their loved ones in India for the same dollar amount. With India receiving the highest remittance in the world ($55 billion in 2010), a fall in rupee can actually benefit the whole NRI population.

This means that a NRI who remitted $1000 to her family in India in early August was able to send only around Rs. 44,100. But if she sends the $1000 three months later, when the rupee depreciated to Rs. 52, her family will receive Rs. 52000.

7.2 Good News for exportersA depreciation of the Indian rupee would lead to a shift in at least a part of this competitive advantage

to the Indian export firms, thus boosting Indian exports. The rise in exports will give a boost to the

recovery of economic growth.

7.3 Improving the trade balanceIn case there is exchange depreciation, Indian importers would prefer to purchase locally manufactured goods. This would add to the growth in demand for goods and services, thus helping in the economic recovery.

Therefore, a weaker domestic currency would make imports dearer. This will act as a barrier against imports, thus improving the trade balance.

However, imports of commodities, like oil, whose demand is relatively in-elastic could dilute, fully or partially, the likely improvement in the trade scenario. Although capital imports are needed for economic growth, the need to curb the deficits is more pressing because deficits have an inflationary impact and they can also lead to financial vulnerability.

7.4 Attract more foreign domestic investment

A weaker domestic currency would help attract more foreign domestic investment. This is so

because international companies would find it more attractive to set up units in India to service their

foreign units because of the cost advantages, which in the case of a strong currency could be partially

or fully wiped out.

8. Rupee depreciation benefits some but not good for the Indian economy.

8.1 Rising prices of importsDepreciating rupee raises the price of imports. Many companies depend on imported material for their

production like automobiles, FMCG, tyres, and etc. The producers pass this on to the consumers. This

will in turn push up the inflation rate, which is already high at 9.73%(October 2011 prices). Prices of cars,

electronics, mobiles and computers will increase if the fall in rupee continues.

8.2 Rising prices of oilWhat is going to hit the common man the most will be the rise in cost of petroleum

products. Depreciating rupee will make the oil costlier to import. Oil price is

already high in India and is fueling inflation. Therefore a further rise in oil prices

will adversely affect the Indian economy.

8.3 Rising prices of consumer durables

(As per business standard, Mumbai November 29, 2011, 0:10 IST ) Makers of consumer durables have increased LG and Samsung, the number one and number two companies in the market, have taken up prices between two and five per cent for home appliances such as refrigerators, washing machines and microwaves this month. Videocon, which is third, will take a price rise of seven to eight per cent from December 1.

prices for the second time in two months, thanks to a falling rupee.

These rises come on the back of increases in September, when the rupee had depreciated by nine per cent in a month. At that time, the top three had raised prices between one and five per cent on home appliances.

Flat panel television sets, which see import of panels and chipsets, were excluded from the September price rise on account of the festive season, when offtake of audio-visual products was high. Most companies have opted not to touch flat panel TV prices in the current round.

Samsung has raised prices of mobile phones by three to five per cent. A Samsung spokesperson said almost all its smart phones were imported and, hence, taking up prices was inevitable, owing to the rupee’s volatility.

From July to now, the rupee has depreciated by 18 per cent against the dollar, trading between 51 and 52 at the moment. It continues to show a downward bias, and is unlikely to ease soon, say market analysts

Most durables manufacturers are not expecting a respite from a falling rupee any time soon. "We are keeping an eye on the currency movement. We are likely to review the situation in January as far as price hikes go,” said Ravinder Zutshi, deputy managing director, Samsung India.

8.4 Weak rupee forces petrochemical firms to increase prices

Despite availability of cheaper raw materials, prices increased twice in two weeks.

Despite crude oil and naphtha prices ruling moderate to low, petrochemical manufacturers have raised prices of polymer products twice in the last two weeks, to offset the impact of a depreciating rupee.

Normally, price revision is a fortnightly or a monthly event. Officials in petrochemical companies said even if naphtha, a derivative of crude oil and a basic raw material for petrochemicals, is ruling lower at $850-860 a tonne, as against $1,000 a tonne a few weeks before, the import cost is too high. In barely two-three weeks, the exchange rate to the dollar has fallen to 53 from a stable 45-46.

8.5 Increase the burden of servicing and repaying of foreign debt of the Indian Government (which has dollar denominated debt) and those companies that have raised dollar denominated debt.

However, a major drawback of depreciation in the value of the rupee is that it will increase the

burden of servicing and repaying of foreign debt of the Indian Government (which has dollar

denominated debt) and those companies that have raised dollar denominated debt. This

drawback is all the more amplified in the case of short-term debt as the burden is immediately

felt.

Depreciating currency might dissuade foreign institutional investment (FII) from investing in the country Another drawback of a weak currency is that it might dissuade foreign institutional investment

(FII) from investing in the country. The prospects of a weaker currency could also lead to a rush

for repatriation of funds by FIIs. The FIIs are permitted to transfer money in and out of the

country at will and therefore if there were a legitimate fear of a large fall in the value of currency,

they may be tempted to repatriate a part of their funds. This could result in a selloff in the capital

markets.

8.7 Higher interest rates

Another fallout of a weaker currency could be higher interest rates in the economy, with the help

of which the central bank/Government might want to fight off the pressure of depreciation in the

value of the domestic currency. Currently, for example, the Reserve Bank of India has opted to

suck out the liquidity from the market to prevent speculative activity in the forex market. This has

been achieved at the cost of a higher call money rate of over 9%. Sustained absorption of

liquidity could sooner or later reflect in higher interest costs for borrowers, which could in turn

adversely affect the growth in investments and consumption.

There are many costs and benefits attached to a stronger and a weaker currency. However,

while deciding on a policy, the economic and political situation must also be factored in. In light

of the current depreciation of the rupee, one must assign a weightage to the various costs and

benefits and then decide whether the depreciation is desirable or not. It is most likely that there

will be large support for both views.

Why RBI is not intervening?

According to Press Trust of India / New Delhi November 28, 2011, 19:46 IST

Global ratings agency Moody's today said the Reserve Bank of India's (RBI) limited intervention in the currency market to stymie rupee depreciation is "positive" for the country's credit outlook.

Rupee, which has slumped about 15% against the US dollar in the past three months, touched an all-time low of 52.73 against the greenback on November 22. The steep fall is hurting importers as well as entities who have borrowed in foreign currency.

Noting that RBI has limited its "intervention in currency markets to periods of extreme volatility", Moody's said such restraint is credit positive.

The decision not to spend large amount of international reserves to support a higher rupee is credit positive for two reasons, it said.

"First, intervention would have expended reserves without reversing the depreciation effectively, since global risk aversion and India's widening current account deficit would have forced the rupee to fall further against the dollar despite the intervention," Moody's Investors Service said in a report.

Further, it pointed out that effective globalization requires market participants to adjust their investment, consumption and borrowing plans as per the availability of foreign capital and import costs.

India's foreign exchange reserves stood at nearly $309 billion as on November 18, as per official data.

"Had authorities used official reserves to maintain the exchange rate at a level higher than dictated by market forces, they would have assisted importers and foreign borrowers at the expense of exporters and import-competing domestic producers," Moody's noted.

Such a move would have delayed or distorted private sector adjustment to global market signals.

"We expect that currency depreciation, by making imports more expensive and exports cheaper, will ultimately force an adjustment, and help narrow the current account deficit over the next few quarters," the report said.

On the other hand, sliding rupee also widens the country's already high fiscal deficit, as the scenario raises the government's petroleum products related subsidy burden.

The rupee depreciation could also result in higher inflation, which is hovering over 9%, Moody's said.

Earlier in the day, Prime Minister's advisory panel chief C Rangarajan said movement in global commodity prices, and not the declining value of rupee against dollar, would have bigger implications for the inflation.

The Central Bank of any country is entrusted with the responsibility of protecting the value of its home currency. They usually kick into action when they suspect any speculative attack on their currency by external forces (Intentional attempts to devalue a country’s currency) In this case, the devaluation of the Indian Rupee was not due to some intentional attempt by anyone. It was due to the global economic scenario and any steps they take might backfire if the global economic situation worsens. The RBI just let the economy take its course with the exchange rate between US Dollar and Indian Rupee because there was no foul play suspected. A point to note here is that, the RBI is closely monitoring the situation and may intervene if

they feel the depreciation is too much.

In fact most of the educated population in any country,   use the local currency without knowing the background and validity of the same. I am happy that you have asked   this question, which will impart a mandatory knowledge to many people all over the world. Because  what is in India is applicable to all over the world.

A) What and who decides the money (currency) in circulation in Indian money market ?

a) The Reserve Bank of India (RBI) manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise, and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934.

b) To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorised selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4368 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

B) Can reserve bank of  India or Indian government bodies decide to print additional currencies to meet public expenditure ?

a) The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

b) The Government of India decides upon the quantity of coins to be minted. The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India

C) Do India need to Deposit some gold in IMF for additional currency printing for meeting the public expenditure.

a) No. Absolutely there is no external foreign or IMF control on the estimation, printing or circulation of Indian rupee notes and coins. But the only external control on the value of Indian money in the international circulation is the “Exchange rate”, with reference to various other national currencies. Indian money is tied to a basket of European currencies (now jointly represented by Euro). The exchange rate parity of rupee fluctuates based on the Indian balance of payment to the world, exports/imports and the parity of Euro in the international market.

b) The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is to one degree or another regulated by the gold supply. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own   safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India..  

c) In modern mainstream economic thought, a gold standard is considered undesirable because it is associated with the collapse of the world economy in the late 1920's. That aggregated the need for the  supply and demand in a far better means of regulating interest rates, money supply and monetary basis. However, many other theories have been advanced for the turbulent economic conditions that existed at this time. While the gold standard is not currently in use, it has advocates for its resurrection and forms part of a basic theory of monetary policy as a standard for comparison for other monetary systems. Advocates of a variety of gold standards argue that gold is the only universal measure of value, that gold standards prevent inflation by preventing the creation of unlimited money supply in a “fiat” currency, and that it provides the soundest theoretical basis for a monetary system.

d) In today’s  economics the fiat currency (a legally binding command or decision entered on the court or government record ) or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government. It is often associated with paper money because, without government fiat, bank notes are not a legal tender in payment of debt, and only specie (metal money) has unlimited legal

tender for money debts. (Note : This is not universally true, as some currencies, notably sterling issued by Scottish banks, is not legal tender but is accepted by longstanding confidence in the Scottish banking system).

e) A Fiat currency or coin is guaranteed by the RBI and the Government of India that :-

A unit of paper or credit money (a “rupee”) can be presented to the issuing bank in exchange for a physical amount of gold, silver, or some other commodity.

A rupee can be returned to the issuing bank in exchange for a rupee worth of the bank’s assets.

To enable this guarantee, the RBI and the Government of India create adequate assets in the nation with assured value, equal or more than the additional notes and coins minted and sent in circulation. This is in addition to the percentage of gold kept in the safe deposit vault of the RBI (See C-b above).

d) The term “fiat” currency is also used specifically to refer to a currency that is not pegged or fixed to a mass of precious metal, and similarly the term “gold standard” is used to refer to fiat currency with a gold bullion exchange system, or to a parallel gold coin/fiat currency with a law that requires that the fiat currency bank of issue to pay in gold coin.

e)  The fiat currency is explicitly circulated in the form of paper money. The inherent value of paper money is zero, except when it is measured against the value of consumables the bearer of such worthless paper can exchange for each unit of currency in his or her possession. Additionally; paper money has an intangible value that is directly related to the condition of need of its bearer. While a one hundred rupee currency may be inconsequential to a person with little material need the same may be the governing factor between homelessness, health, and even life for another with lesser means.. In other words,  paper money is valued at the maximum amount of consumable for which it can be traded either directly or indirectly.

D) If yes,  Is there any external power controlling the Indian money market or world money market who decide how much & how India should make currency in circulation.

The answer is NO. Please see answer ( C )  above.

E) Additional reference and informative reading materials

a) Reserve Bank of India : Frequently Asked Questions - Your Guide to Money Matters.http://www.rbi.org.in/scripts/BS_CurrencyFAQView.aspx?Id=39http://www.rbi.org.in/scripts/AboutusDisplay.aspx

How Interest Rates Affect Everything by Michele Cagan, CPA

From stocks to bonds to real estate, every investment is somehow affected by interest rates, albeit to a different extent. To understand that impact, you first have to understand how interest rates work. For most of us, interest is just something we earn on our savings accounts, or (more often) more money we have to pay to credit card companies. For some, it's the mysterious number connected with mortgage payments. And that's where it ends for us; that's the direct impact of interest rates on our lives.

It begins, though, with the Federal Reserve. The Federal Reserve has the power to manipulate the federal funds rate, which is the interest rate that Federal Reserve banks charge other banks like yours to borrow money. That rate sets the tone for all other interest rates, like the ones on your car loan, mortgage, and credit cards. The Federal Reserve uses this rate to control inflation. To keep inflation from spiraling out of control, the Fed raises its rate, which has the effect of limiting the amount of money available for consumer spending. Higher interest rates mean that more money goes to interest payments and less to shopping.

When people and businesses have to pay more in interest, which leaves them less to spend, investors can take a hit. So while a change in the federal funds rate doesn't immediately impact the markets, it does affect them indirectly, through both consumer spending and corporate bottom lines. When corporations have to pay more to borrow money, that's less money for the dividend pool and less money to put toward future growth. Plus, corporations with diminishing profits usually see their share prices drop right alongside the disappearing earnings. So even if nothing else changes, an interest rate increase can push stock prices down.

When the Fed lowers interest rates, the money supply increases. That often signals investors to buy stocks, as lower interest rates make stocks appear more attractive on the risk-return scale. Lower rates also aid economic

expansion, which leads to corporate growth, which increases the value of corporate shares.

There's a flipside to this, though. A higher federal funds rate also means higher interest rates paid out on newly issued Treasury securities. These risk-free investments guarantee you steady returns, and when rates go up, you're guaranteed bigger interest payments on these government securities. This also has the effect of higher interest rates on newly issued municipal and corporate bonds.

Why the Economy Matters Understanding the Economic Indicators

Mostly the higher the interest rate of one country, as compared to another causes the higher value on the currency. Higher rates of interest equals higher value of currency. Increase the interest rates in America versus the rest of the world, and then you have higher dollar values.

Interest rates are a huge factor.  If interest rates rise, the country's currency is worth more because it becomes more attractive to put money in that country.  Think about it this way, if bank A gives you a higher interest rate on your savings account than bank B, wouldn't you want to move your money over to bank A?  The same goes for countries.  As interest rates decline, the currency usually declines as well.

Other economic factors also can affect a currency's value.  If the economy is doing well and people expect it to continue to do well, the currency will rise.  If the country is doing poorly, the currency will fall.  Buying currency is similar to buying stock.  You want to own something that you believe will become better, not worse.