Rupee Dip Won't Spoil Holiday Plans
Synopsis
On September 27th 2015, the Indian Rupee depreciated to 66.16 against a US Dollar. However, the base article says that the rupee’s slide has had no major impact on the traveller’s budgets, travel destinations (international or domestic), mode of travel, duration of holiday, accommodation, food, adventure or shopping. An analysis of the information presented in the base article would sensitize participants/students as to how depreciation of a currency affects an individual consumer. With relevant and related concepts – exchange rates, Purchasing Power Parity (PPP) and devaluation of a currency – this case flyer can be used to explain how macroeconomic variables affect a microeconomic unit i.e., individual consumer. Apart from the individual consumer, the case flyer also analyzes the effects of currency depreciation on exporters/importers, companies, government, etc. It also debates about the role of government in maintaining a stable exchange rate.
Prerequisite Conceptual Understanding/Before the Classroom Discussion
The students/participants should be asked to read the following chapter to help them connect the concepts discussed in the case flyer:
- • Paul A. Samuelson, et al., “Exchange Rates and the International Financial System”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the concepts of foreign exchange, exchange rates, Purchasing Power Parity (PPP), appreciation and depreciation of currency and devaluation of currency
Case Positioning and Setting
The case flyer can be used in MBA, Executive MBA or Executive Development Programs, for the following module/topic:
- • Foreign Exchange Rates – To understand the concepts of foreign exchange, exchange rates and Purchasing Power Parity, appreciation, depreciation or devaluation of a currency and their effect on the economy, business and an individual consumer
Preamble to the Case Flyer Analysis and Suggested Orchestration
This case flyer gives an understanding about the exchange rates of the currency, its determination, various types of exchange rates and the importance of Purchasing Power Parity in exchange rate dynamics. It also introduces the students/participants to the concepts of appreciation of currency, depreciation of currency and the difference between depreciation and devaluation of currency. Further, it helps understand the effects of appreciation and depreciation of currency on individual consumers, companies, exports and imports and the country. The analysis of the facts presented in the base article helps to determine the effect of depreciating rupee, Ceteris Paribus, on the holiday plans (and other consumables) of individual consumers and the reasons behind their decisions. This case flyer analysis was carried out as presented in Exhibit (TN)-I....................
Case Analysis and Discussion
I. Exchange Rates, PPP Theory and Depreciation and Devaluation of a Currency
The discussion can be started by knowing the participants’ understanding about the exchange rate, its types and regimes. Then, the subsequent questions in this section would help the participants to know more about the variations in the exchange rates (appreciation, depreciation and devaluation) and the factors affecting the same and about PPP.
1. What is exchange rate and how is it determined?
Exchange Rate is the price of one country’s currency measured in terms of another country’s currency.
It measures how much of one currency can be purchased with the other currency.
For instance, as on September 27th 2015, the Indian Rupee price of one US dollar was INR66.16, i.e., it took INR66.16 to purchase US$1.
Exchange rate determination depends on two factors – the demand of the currency and the supply of the currency.
Demand is a function of domestic resident’s need for foreign exchange to consummate intended overseas transactions.
Supply is a function of foreign residents need for US$ to consummate transaction in the US. This can be represented through a graph [Exhibit (TN)-II].
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Exhibits
Exhibit (TN)-I: Suggested Classroom Orchestration
Exhibit (TN)-II: Exchange Rate Determination: Demand and Supply
Exhibit (TN)-III: Depreciation vs Devaluation of Currency
Exhibit (TN)-IV: Devaluation based on Rate of Change
Exhibit (TN)-V: Devaluation Leads to Inflation
Exhibit (TN)-VI: Relationship between Inflation and Exchange Rates
Exhibit (TN)-VII: Effect of Rupee Appreciation and Depreciation
Exhibit (TN)-VIII: Effect of Rupee Devaluation
Exhibit (TN)-IX: Stable Exchange Rate – Role of Government
Exhibit (TN)-X: Effect of Appreciation and Depreciation on Stock Market Returns
Exhibit (TN)-XI: Effect of Appreciation and Depreciation on Industries
Exhibit (TN)-XII: Historical Exchange Rate – Rupee to US Dollar
Exhibit (TN)-XIII: Effect of Rupee Value on Indian Consumer
Exhibit (TN)-XIV: Effect of Appreciation and Depreciation of Rupee on Travel
Exhibit (TN)-XV: Effect on Indian Tourism and Education
Exhibit (TN)-XVI: Elasticity and Exchange Rate