Basics of appreciation and depreciation of rupee

Nowadays it’s very important to know meanings of these 2 terms, appreciation and depreciation. If switch on cnbc or ndtv profit we hear these terms very often. So what these terms mean and what is logic behind them?

Let’s have a look
What is exchange rate?
In simple terms it is defined as rate or price at which one country’s currency is exchanged for another country’s currencies.
Suppose there are 2 currencies $ and rupee (R), now exchange rate between these 2 currencies can be expressed as $/R or R/$. These are reciprocals of each other. Thus if E is the $/R exchange rate and V is the R/$ exchange rate then E = 1/V.

For e.g. on September 15 th 2008 the following exchange rate prevailed,
E =45 which implies V= 0.022
V= 0.023 which implies E =43.47

Currency value
It is important to understand that value of one currency is always given in terms of other currency. Thus the value of Indian rupee (INR) in terms of dollar is the $/R exchange rate.

Currency appreciation: currency appreciates with respect to another, when its value rises in terms of the other. The rupee appreciates with respect to dollar when if the $/R exchange rate rises.
For e.g. value of rupee in terms of dollar is:
September 15 - 45
September 16 – 44

Using the percentage change formula: (new value – old value)/ old value
44-45/45 *100 =2.22%
Therefore rupee has actually appreciated by 2.22%. Here the value of rupee rises against dollar by 2.2%.



Currency depreciation: A currency depreciates with respect to another when its value falls in terms of another.
For e.g. Value of rupee in terms of dollar is
September 15 - 44
September 16 – 44.78

Using the same formula
44.78-44/44*100 = 1.7%

Therefore rupee has depreciated by 1.7%. Here value of rupee falls against dollar by 1.7%
This is in simple terms what is appreciation and depreciation. Who gets affected by appreciation and depreciation and how it’s impacting India will be discussed in my following post.