Updated in 2019Based on the World Banks data on PPP, it will cost you $0.
275 in India to buy a basket of goods worth $1.
PPP conversion factor (GDP) to market exchange rate rationSo based on that, and todays currency conversion rate of 68.
51 INR/$, I would calculate the PPP exchange rate to be 68.
51 * 0.
275 = 18.
Any reasonable man can bet, all this stuff is under the umbrella of the RBI.
Well, that was the case years ago.
Now itu2019s beyond RBIu2019s ambit, practically.
English, please? Okay ;-),See.
as a nation, you have broadly two options.
,You can choose to adopt a Fixed Exchange Rate regime (not literally fixed though).
Herein, your currency is pegged (linked) against something else (gold, silver or any other more stable currency).
Take it this way.
suppose there are two countries, Hind & Amer.
Currency of Hind is u2018Rupu2019, and that of Amer is u2018Dollu2019.
Hind fixes the price of one gram of gold at 20,000 Rup & Amer fixes price of one gram of gold at 5,000 Doll.
Thus now, Rup is linked to gold where value of 1 Rup is 1/20000th the price of one gram of gold.
Similarly, Doll is 1/5000th the price of one gram of gold.
Subsequently, as the price of gold changes, the value of the currencies moves in tandem (in the same ratio).
This is called pegging against gold standard.
,Now, suppose Hind imports goods from Amer, so it has to make a payment of 1 Lakh Doll.
How to do that? One option is this.
The gold equivalent to 1 Lakh Doll for Amer is 20 grams (= 100000 Doll / 5000 Doll per gram of gold).
Now, Hind purchases this much gold by paying 4 Lakh Rup (= 20 grams * 20,000 Rup per gram).
Then, Hind exports the gold to Amer, which is then sold by Amer to obtain 1 Lakh Doll (assuming other things constant).
,So, every time you trade stuffs, this happens.
But doesnu2019t it seem to be a tedious method? Instead, why not link the currencies directly? And how to do that?,Well, if one-gram gold costs 20000 Rup and the same costs 5000 Doll.
Canu2019t we say that 1 Doll = 4 Rup (=20000/5000).
If Doll happens to be a more stable international currency, Hind can choose to peg Rup against Doll, where 1 Doll = 4 Rup.
As the value of Doll changes, Rup moves in tandem (ratio of 1:4).
Accordingly, all exchange rates were determined.
,Thatu2019s currency pegging for you.
,In similar terms, Rupee (u20b9) was first pegged against gold standard; then in 1931, it was pegged against British Pound (u00a3) and subsequently, we chose to peg it against the king - US Dollar ($).
Okay, now you ask if the ratio was fixed, how did rupee depreciate this hell lot?,Well, there is something called devaluation of currency.
What it means is that suppose due to some reasons (war or natural disasters), a countryu2019s output is shattered.
Thus, it exports less and imports more.
Less exports means other countries donu2019t buy goods from it and thus they no longer need that currency (for payment); i.
it is now less valuable.
Hence, the currency is manually devalued (may be to 1 Doll = 7 Rup).
Thus, devaluation is recognizing that oneu2019s currency is less valuable than what it used to be.
Itu2019s a sudden, overnight declaration (by the RBI for India).
,Indian Rupee (u20b9) was devalued a number of times, in 1951 due to high external borrowings, in 1965 due to wars against China and Pakistan, in 1991 due to impact of Gulf war and so forth.
,This fixed system has a major limitation.
If you peg your currency against another, you essentially lose the ability to design an autonomous monetary policy.
Because your policies will now depend upon the performance of the currency against which you have pegged! And this had bad implications, e.
: Thai Baht (1997).
,Thus, we come to the second choice, Flexible Exchange Rate regime.
It is basically a free float system, where you allow the currency to adjust itself as per the demand and supply.
No manual intervention required.
If the demand of the currency increases, more people purchase that currency and thus, its value increases and vice-versa.
It is influenced by a number of factors, one of which is inflation.
Higher the price of goods, lower the purchasing power of money and thus lower the value of currency.
Other factors are repo rates, public debt, current account deficit, economic growth, etc.
,India converted from fixed regime to flexible regime in 1992-93 after the harsh consequences of the Balance of Payment crisis in 1991.
And the value of u20b9 has been plunging since then.