Monday, February 9, 2015

Appreciation and Depreciation

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Each country has its own currency (except some European countries in Eurozone use common currency - 'Euro'), and each currency has its own valuation.

Therefore, for a foreign transaction, there should be a mechanism to convert one currency to another (to know how much of one currency is equivalent to other). The rate is known as Conversion rate, or Exchange rate.

For example, currently (February 9, 2015), 1 US Dollar = Rs. 62.15, or Re. 1 = USD 0.016 is the conversion rate between Indian Rupees (INR) and US Dollar (USD).

Depreciation
Note carefully, that if the conversion rate of INR to USD (USD @ Rs. 62.15) increases (meaning more Indian rupee is needed to buy a US Dollar), then the valuation of Indian Rupee decreases. It means depreciation of Indian Rupees with respect to US Dollar.

Appreciation
Whereas, if the conversion rate of INR to USD decreases (meaning less Indian rupee is needed to buy a US Dollar), then the valuation of Indian Rupee increases. It means appreciation of Indian Rupees with respect to US Dollar.

Example
For example, currently the conversion rate is USD @ Rs. 62.15. So, to buy 100 USD, we need to spend Rs. (100 x 62.15) = Rs. 6215

Now suppose, INR depreciates to Rs. 65 per USD (note 62.15 -> 65 is an increment, but actually the value of INR decreased, meaning more INR needed to buy the same amount of USD). Therefore to buy the same 100 USD, we need to spend Rs. (100 x 65) = Rs. 6500. It means we need to spend more (Rs. 285 more), because of the depreciation of INR to USD.

Similarly, if INR appreciates to Rs. 60 per USD  (note 62.15 -> 60 is a decrement, but actually the value of INR increased, meaning less INR needed to buy the same amount of USD). Therefore to buy the same 100 USD, we need to spend Rs. (100 x 60) = Rs. 6000. It means we need to spend less (Rs. 215 less), because of the appreciation of INR to USD.


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