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The Value of India's Real Exchange Rate

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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.

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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.

See Also This Related BrainMass Solution

Exchange rate of a Rupee

BUS 635 Business Economics for the World Market
Session 7 Bonus Points
10 Points (max) to be added to final total

Note: This portion should take about 10-20 minutes to complete IF YOU ARE PREPARED. If you are NOT well-prepared will take much longer, depending upon how long it takes you to study and learn it.

Due: July 10 noon

Please complete this exercise in Word and submit an electronic copy of it. This is to be independent work. Do not "check" one another's work. Do not compare answers. Do not copy one another's work. Do not collaborate on answers. Reason out the answers yourself and submit your best responses to the questions posed. The take home bonus that you submit should reflect your own level of understanding.

On Friday September 20, 2013, India's Central Bank, the Reserve Bank of India (RBI), moved to raise interest rates. Assume the impact was an increase in the real interest rate on India's securities denominated in the Indian rupee (INR). Earlier that week, the US Federal Reserve announced it would continue its policy of maintaining low US interest rates.

A. The US and India are trading partners. Given the information and assumption above, what is the net result on India's relative real interest rate (compared to the US interest rate)?


B. Draw a graph depicting the market for foreign exchange between the U.S. and India, which depicts specifically the market for the Indian Rupee. You must label each axis correctly, each curve correctly, and the initial equilibrium exchange rate correctly.

C. Given your answer above, explain whether, all else equal, the demand for the IRP increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above.

D. Given your answer above, explain whether, all else equal, the supply of the IRP increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above.

E. What happens to the value of the rupee against the dollar? Depict the new equilibrium on the graph above.

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