Demand for foreign exchange
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Demand for foreign exchange is the amount of foreign currency that residents want to buy. It comes from three sources: paying for imports, sending gifts abroad, and buying foreign assets. When the price of foreign exchange rises (more rupees per dollar), imports become dearer, so people demand fewer dollars. So the demand curve slopes downward.
Example
Suppose more Indians start travelling abroad. Their demand for dollars rises, and the demand curve shifts to the right. Under a flexible rate, the rupee price of a dollar may rise from ₹50 to ₹70, which is a depreciation of the rupee.
Don't confuse with
- Supply of foreign exchange: this comes from exports, transfers from foreigners and foreign purchases of Indian assets. It usually rises as the exchange rate rises.
Related concepts
- Foreign exchange market
- Foreign exchange
- Foreign exchange rate
- Supply of foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Currency speculation
- Interest rate differential
- Interest rate parity