Attracted by the share market situation in India, American investors are buying Indian

shares.

Indian Rupee is a floating currency that is it has floating exchange. From the number of buyers
and sellers who are trading in the foreign exchange, we can determine its price against dollar.
Whenever number of buyers wills be more than number of sellers value of rupee will rise. This
situation is similar to how price in stock exchange are determined except the fact that that the
Rupee foreign exchange spot market is decentralized, over the counter market consisting of a
network of dealer banks acting as Market maker.
Mutual funds, insurance companies, pension funds, university funds, investment trusts,
endowment funds and charitable trusts which are incorporated outside India but are investing
in equity and debt securities in the country are considered as Foreign Institutional Investors
(FII)
In order to understand how FII impacts exchange rate, we need to understand how the value of
the currency goes up (i.e. when it appreciates) or goes down against the (when it
depreciates).this concept can be understood through demand and supply. For example US
imports from India than it is creating a demand for rupee therefore India rupee will appreciate
w.r.t to the dollar. However if India imports then the dollar will appreciate with respect to
Indian rupee.
Considering the case of FII’s for every dollar that is being brought into the country, there is a
demand for the rupee that is being created and therefore creating a need for RBI to print and
release the money in the country. Since the demand is being created by FII’s for Indian rupee
therefore Indian rupee will appreciate w.r.t to dollar.
For example if prior to the demand the exchange rate was: - 1 USD= rupee 40.After FII’s invest
Exchange rate will become:-1 USD = 39.
Similarly when FII withdraws the capital from the markets, they need to earn back the dollars
buck so this creates a demand for dollar and value of rupee depreciates. 1 USD which earlier
was equal to 39 goes back to Rupees. 40. Thus FII inflows make the currency of the country
appreciates in which they are investing therefore FII investing in India may lead to Rupee
appreciating w.r.t several other currencies) and their selling and disinvestment may lead to
depreciation.

Therefore we observe that Rupee appreciates when FII invest in India.

Therefore if American investor invest in India share market value of rupee will appreciate.
2) Demand for Darjeeling Tea is increasing in Canadian market

Through one of the website has been found that even though the prices of the Darjeeling tea
have surged by 15-25 % in the international market, primarily on the account of less availability
of this variety tea producers might just fail to convert the increase in price into higher profits
owing to currency volatility.

Tea producers from Darjeeling said that the price increase has happned majorly in the mid-
range bracket where tea was sold between rupees 1300 – rupees 1500 a kilogram, while its Rs
3000 2-330 a kilogram for the upper bracket.Howerver there has been stagnation at Rs.500 –
Rs.700 a kg for lower grades.

80% of the Darjeeling tea is exported and some have been able to maintain a profits of Rs 40-
50 kg for the best grades.
In order to understand the effect of increase in demand of Darjeeling tea in Canadian market,
following example can be taken into account.

Appreciation of currency means rise in the value of the domestic currency in relation to foreign
currency.

For instance:-if previously 1$= Rs.50 after appreciation the exchange rate will will go down to
1$=40.

Appreciation of currency has negative impact on the exports, as it becomes costlier to import
item from India.

For instance if we consider the export of Darjeeling tea in Canadian market then:-
Let us suppose that Tea is sold at rs 200 per kg or $4 per kg with the value of 1$=50 Rs.

If the currency now appreciates and the value of 1$=40 Rs, then 1kg will be sold to international
market at $5 therefore increasing the cost by 1$.

Therefore the rupee will appreciate when tea will be exported to the Canadian market.
3) Due to UDAN Scheme import of oil is increasing in India.
A country’s current account reflects balance of trade and earnings on foreign investment. It
comprises of total number of transactions including its exports, imports, debt, etc. Deficit in
account occurs due to spending more of its currency on importing products rather than earning
through the sale of export items therefore this causes depreciation. BOP (balance of payments
fluctuates exchange rate of its domestic currency.
India is considered as one of the largest importers of oil in the world. It imports nearly 80% of
its total oil needs [1] therefore this accounts for 1/3rd of its total imports. This is the major
reason due to which price of oil affects India a lot. Fall in price will lower the value of its
import. This narrow downs India's current account deficit that is the amount India owes to the
world in foreign currency.
A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion,
according to a report by live mint. This amounts to nearly 0.43% of the GDP.India is one of
the largest importers of oil in the world
Price of oil affects the entire economy especially because of its usage in transportation of
goods and services. Rise in oil price leads to an increase in prices of all goods and services.
This eventually affects us directly as the price of petrol and diesel rise. Due to this inflation
rises. High inflation is bad for an economy. This also affects companies as input cost rises and
also there is a fall in consumer demand. For this reason when the price of oil decreases it is
considered ad boon for India. Every $10 per barrel fall in crude oil price helps reduce retail
inflation by 0.2% and wholesale price inflation by 0.5%, according to a Money control report.
Effect of oil price on exchange rate:-
Value of rupee depends upon it demand in the currency market. Because of this reason it
depends to a great extent on the CAD (current account deficit).High deficit implies that the
country has to sell rupees and buy dollars to pay its bills. This causes reduction in the value of
the rupee. Fall in oil prices is therefore good for the rupee. However, the negative aspect is that
the dollar value appreciates every time when the value of oil falls. This therefore negates any
benefits from a fall in CAD (current account deficit).
Oil price and its imports are rising continuously. This therefore increases the demand for dollar
which hence by strengthens the dollar against rupee and Indian rupee is continuously
depreciating. This decreases purchasing power of Indian currency in the international market.
The domestic oil supply increase and control over oil demand seems to be viable policy option
to overcome exchange rate depreciation and its consequences.
Therefore as the import of oil will increase Indian currency will depreciate.