Due to the recent fluctuations in
the foreign exchange market in India, it is highly essential to focus on the
concepts related to this.
Good money must possess certain
qualities. The most important among them is its acceptability – means that all the people must accept money with confidence that
its value will remain and can be used for exchanging goods and services within
the territorial jurisdiction of that country. Money has acceptability, because it is made legal tender by the act of
parliament (in countries that are constitutionally established to do so.
Legal tender is defined as a legally valid currency (in specified
denominations) that may be offered in payment of a debt and that a creditor
must accept in redemption of a debt as per a law of the land. Denomination of
country's paper currency and coins acceptable as legal tender varies from
country to country. Cheques, credit cards, debit cards, Checks and postal
orders are not legal tenders and are accepted only at the option of the creditor, lender, or seller are also
called lawful money.
In some countries legal
tender can be refused as payment if no debt exists prior to the time of payment;
that means the obligation to pay arise at the same time of offering the
payment. For example: transport staff
does not have to accept the largest denomination of banknote. The payment for vending machine is possible
only with the specified denomination of currency or coin. Shopkeepers may
reject large banknotes: this is covered by the legal concept known as invitation to treat. Invitation to
treat is a contract law term. It comes from a Latin phrase which means
"inviting an offer". An invitation
to treat is “an expression of willingness to negotiate. A person making an
invitation to treat does not intend to be bound as soon as it is accepted by
the person to whom the statement is addressed."
Here, the matter to be considered
is, whether we accept it or refuse it to settle the debt but the value. In the
wake of Indian rupee volatility, the question to be dealt with is whether the people were losing their confidence in the currency or what is the fair value of the Indian rupee or in other
sense, can it regain
its value back
to a stable level. Value, in economics, the worth of a
commodity or service measured against other commodities or services. The value
of any object in the marketplace is determined by desirability and scarcity. But
the value of money cannot be measured in terms of money;
therefore it is measured in terms of the price of other commodities that can be
bought with money. These are
the questions generally layman ask, for
which there is no definite answer. One
can see the value of the rupee in terms of other currency. This market value may also be referred to as
the exchange rate.
According to the pricing theories, price of anything in a free market is
determined by the forces of demand and supply. According to this analysis, both
short supply and excess demand cause, to push the price high. There are many
vital aspects which lead to this shortage of supply and or excess in demand.
India is one among the
rapidly growing economy in the world, and which requires huge quantum of
energy. India is not self-sufficient with her energy resources. The major
energy source used in India is oil and around 70 percentage of India’s oil
consumption is depending on imports. It causes an increasing demand for foreign
exchange (mainly US$) to pay the imports.
In the beginning of the
volatility, in order to control, the government will take short term measures.
One such measure was Central Bank’s
(Reserve bank of India) restrictions of capital withdrawal by corporates and
individuals then, which caused concern among overseas investors that the
government is on the verge of financial crisis, (Earlier, in the 1999 due to
balance of payment deficit, Government of India put up strict control over
capital) aggravated the position of foreign investors and they either pulled
back by selling $701.4 million worth of shares during this time, and now they
are reluctant to invest in India for the time being.
The speculation in the
currency market in the short run led the rupee breaking the 64 to a dollar. Its
impact in the economy is alarming and the same is reflected in the stock market
as well as the commodity market. Over and above this, in order to meet the
forthcoming festival season’s growing demand, a panic trade in the commodity
markets carried the Gold prices to Rs. 3170 per gram.
Earlier this
year, Indian economy estimated to grow close to five per cent in the April-June
quarter of 2013-14, is strained by the widening current account deficit and the
volatile rupee. Experts forecast that Rupee
may fall down further as dollar is demanded due to the increasing defence and
oil import requirements.
The rate of
Inflation affects the exporters badly and boost imports cause another burden on
the balance of trade deficit which in turn affects the currency prices.
Administrative issues regarding the economic instruments used,
use of economic theory and its forecasts
will have conflicts in its
opinion of choice, data, and implementation. The strength of the economic instruments depends on the accuracy of
information gathered and the interpretation in the economic models used.
The delays involved in government machinery, the time taken to
recognize the problem, time taken to formulate policy measures, time taken to
implement the policy and time taken by people and firms to react to the
policies is all important factors influencing the market reaction on finance.
Although, economic advisers may recommend certain economic
measures, due to political influence
a government may choose to ignore the advice or postpone the implementation as
they are against their political popularity. The civil servants’ and politicians’ self-interest which also may be
influenced in policy decisions even if it is not in the country’s interest such
as dealing with corruption, externalities and so on.
Even with all these shortfalls, the
Indian government is finding the ways to shore up foreign capital to bridge the
widening current account gap and stabilitse the currency volatility.