Rupee appreciation and depreciation

Context: Rupee gained 8 paise to close at 82.50 against the U.S. dollar recently.

About depreciation :

• Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
• Rupee depreciation means that the rupee has become less valuable with respect to the dollar.
• It also means that the rupee is now weaker than what it used to be earlier.

Factors affecting depreciation :

• Wear and Tear due to Use or Passage of Time:

• It is the deterioration that is followed by a decrease in the value of an asset, resulting from its use in business operations to earn revenue.
• Some orders of means lose their value after the agreement directing their use in business comes to an end after the expiry of the predetermined period.

• Obsolescence

• It is another factor driving the depreciation of fixed assets.
• It means being “out-of-date”.
• An actual asset that is becoming outdated on account of the availability of a better type of asset is referred to as obsolescence.

• Abnormal factors that are responsible for the drop in the use of the asset like accidents due to the earthquake, fire, cataracts, etc., Accidental loss is endless but not continuing.

About appreciation :

• It is an increase in the value of one currency in relation to another currency  in a floating exchange rate system.
• Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances and business cycles.
• Currency appreciation discourages a country’s export activity as its products and services become costlier to buy.

Factors affecting appreciation :

• Appreciation is directly linked to demand.
• If the value of the currency appreciates (or goes up), demand for the currency also rises.

Source: THE HINDU

Previous Year Questions

Q.1)  Consider the following statements: (2021)

The effect of the devaluation of a currency is that it necessarily

1. Improves the competitiveness of the domestic exports in the foreign markets
2. Increase the foreign value of the domestic currency
3. Improves the trade balance

Which of the above statements is/are

1. 1 only
2. 1 and 2 only
3. 3 only
4. 2 and 3 only

Q.2) Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of the Indian rupee? (2019)

1. Curbing imports of non-essential goods and promoting exports
2. Encouraging Indian borrowers to issue rupee-denominated Masala Bonds
3. Easing conditions relating to external commercial borrowing
4. Following an expansionary monetary policy