Question

Visits of foreign countries for sightseeing etc. by the people of India is on the rise. What will be its likely impact on foreign exchange rate and how?

Answer 1

With an increase in foreign visitors to India, there will be an increase in the demand for foreign currency. Assuming other things remain constant, an increase in the demand for foreign exchange will raise the foreign exchange rate. Hence, this is reflected by a shift in the demand curve to the right as shown below.

DD and SS are the initial demand and supply curves of foreign currency, respectively. As there is an increase in the demand for the foreign exchange rate, the new equilibrium is established at Point E′. Here, it states that the currency depreciates with a rise in the exchange rate from OR to OR₁.