question_answer

Visits of foreign countries for sightseeing etc., by the people of India is on the rise. What will be its likely impact on foreign exchange rate and how?

Answer:

With the increase in the foreign visit by the people India, the demand for foreign currency increases. With the supply of foreign currency remaining same, the foreign exchange rises, implying a depreciation of rupees. This can be explained diagrammatically as follows.

In the diagram, DD and SS are the initial demand curve and supply curve for foreign currency respectively. E is the initial equilibrium point, with OR as the equilibrium exchange rate. An increase in the demand for foreign currencies shifts the demand curve from DD to D ?D? With the shift in demand curve, new equilibrium is established at point E? where the exchange rate rises from OR to \[O{{R}_{1}}\] and the demand and supply of foreign currencies rises from OQ to\[O{{Q}_{1}}\]. A rise in the exchange rate implies currency depreciation.