If prices increase, it means the value of the currency has eroded and its purchasing power has fallen. Prices shoot up when goods and services are scarce or money is in excess supply. ![]() While an increase in interest rates makes a currency expensive, changes in cash reserve and statutory liquidity ratios increase or decrease the quantity of money available, impacting its value.Įvery generation complains about price rise. The RBI also fixes the statutory liquidity ratio, that is, the proportion of money banks have to invest in government bonds, and the repo rate, at which it lends to banks. "Some ways through which the RBI controls the movement of the rupee are changes in interest rates, relaxation or tightening of rules for fund flows, tweaking the cash reserve ratio (the proportion of money banks have to keep with the central bank) and selling or buying dollars in the open market," says Brahmbhatt of Alpari. The RBI manages the value of the rupee with several tools, which involve controlling its supply in the market and, thus, making it cheap or expensive. By allowing banks to increase rates on NRI rupee accounts and bring them on a par with domestic term deposit rates, the RBI expects fund inflows from NRIs, triggering a rise in demand for rupees and an increase in the value of the local currency. The move was part of a series of steps to stem the fall in the rupee. Let us consider the recent RBI move to deregulate interest rates on savings deposits and fixed deposits held by non-resident Indians (NRIs). This strengthens the local currency," says Kishore Narne, head, commodity and currency research, Anand Rathi Commodities, a brokerage house.Īnother factor is the difference in interest rates between countries. This means more foreign currency comes into the country than what is paid for imports. "A country that sells more goods and services in overseas markets than it buys from them has a trade surplus. National Savings Certificates are not included in M4 either.īalance of payments, which comprises trade balance (net inflow/outflow of money) and flow of capital, also affects the value of a country's currency. Includes M3 money supply along with other post office deposits as well. It is used as a common measure of money supply. It excludes money in post office fixed deposits and National Savings Certificates.Ĭomprises M2 money supply plus fixed deposits (or time deposits) held with banks. Includes money held in post office savings accounts along with M1. The value of a country's currency is linked with its economic conditions and policies.Ĭomprises all the currency in the economy as well as the money in savings and current accounts held with banks (demand deposits). ![]() One rupee in 1947 is not the same as one rupee today, both in terms of appearance and purchasing power. Money is not an organic creature but its value keeps changing with the society and its economic conditions. They exist as entries in ledgers of financial intermediaries and can be used to make payments for goods and services. Instruments such as cheques, demand drafts and banker's drafts are commercial bank money. In contrast, fiat money's value is imposed by the government, which makes refusal of payments made in the notified legal tender, in the form of currency notes and coins, illegal. ![]() Representative money is token coins and notes that can be exchanged for a fixed amount of precious metals or other commodities. The use of commodity money is similar to barter, except that the commodity used is widely accepted and can be easily handled. Gold coins, cocoa beans, cattle or anything that has a value of its own and is used as a medium of exchange is commodity money. It can be of different types-commodity money, representative money, fiat money and commercial bank money. Money is the value assigned to a commodity, a piece of paper, a coin or electronic data (think online banking and credit cards). Shops accept currency notes and coins, but they also accept credit cards. With the exception of someone living in a cave on an undiscovered island, everyone uses money.
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