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The Value of India's Real Exchange Rate

Please help with a part of an assignment, its says:

A manufacturing organization is considering expansion to India or Brazil

What has happened to the value of the real exchange rate over time? What is the significance of this change in value?

What are bid-ask spreads for each currency? Include your calculations.

Solution Preview

What I will do is lay out the variables for making currency predictions relative (of course) to the nature of the Indian economy.

Let's deal with the Indian rupee.

Go here: http://www.forexpros.com/currencies/usd-inr-forward-rates and
here: http://www.x-rates.com/d/INR/USD/hist2012.html

You can do the same with the Brazilian Real (but we'll stick with India -- the concepts are exactly the same).

India is experiencing high levels of economic growth. Yet, the rupee is very undervalued compared to the dollar.
This means several things (in theory)

1. That this is deliberate Indian policy to keep rates low
2. That the Indian government is keeping rates low for the sake of financing exports
3. That the Indian government (or its central bank) wants to undercut China for these same export markets (esp the U.S. and EU)
4. India does not fear inflation because her production is way up. So long as production remains high (and markets exist), they can afford to undervalue the rupee.

As far as ask prices are concerned. Let's remember a few things:

1. We're talking about comparative values for currency pairs (in this case, the rupee to the dollar)

2. There has been a spike (in the last 2 months) of the dollar against the rupee.

3. This means that those who bet on the increase of the dollar value has ...

Solution Summary

The value of India's real exchange rate is determined in the solution. The bid-ask for each currency is examined.

$2.19