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Rupee at historic low; why is it falling?

February 27, 2009

But why do currency values fluctuate?

There are many participants in any foreign exchange market. These entities -- like banks, corporations, brokers, even individuals -- buy and sell currencies everyday.

Here too the universal economic law of demand and supply is applicable: when there are more buyers for a currency than sellers, its exchange rate rises.

Similarly, when there are more sellers of a particular currency than buyers, its exchange rate in the global markets will fall. This does not mean people no longer want money; it only means that people prefer to keep their wealth in some other form or another currency.

Image: Stock brokers belonging to the Bombay Stock Exchange and the National Stock Exchange protesting outside the BSE building. | Photograph: SK/CP/Reuters

Also read: Outsourcing? Focus is back on India!

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