Everyone is talking about the weakening rupee. Do you know what that means?

This month, let us take a break from our historical tour of money and look at something that is getting lot of attention in the media — the US$ - Rupee exchange rate. What is an exchange rate and why do we need to know about it?

When you travel abroad, you will have to convert your Indian Rupees (INR) to the currency of the country you are visiting. For example, in case you are travelling to Thailand, you would convert your INR to USD (U.S Dollar) in India. Once you reach Thailand, you would convert the USD to Thai Baht ( THB), the currency used in Thailand. This is because USD is traded globally round the clock and is the currency of choice for much of world trade. It is the currency in which important commodities like crude oil are quoted. Hence, it is accepted all over the world. INR and THB are not all that widely accepted outside their respective national borders.

If you go to a money changer, who exchanges USD for INR or vice versa, you would find that the currently exchange rate for the USD-INR is around 52.30. What does this mean? First, an exchange rate is always between a pair of currencies. Therefore, you always need two currencies to obtain an exchange rate. The exchange rate is the rate at which the two currencies are exchanged. So, 52.30 means that 1 USD can be exchanged for Rs. 52.30 INR. Can you find out what is the USD-JPY ( Japanese Yen) exchange rate?

If you take a look at the USD-INR foreign exchange chart, you will see that mid-2011, the exchange rate was around Rs. 44.00. In less than six months, it has skyrocketed to over Rs. 52.00. In fact, the exchange rate between this currency pair is almost as high as it has ever been.

What does this mean to you and me?

It means that we need more INR to buy 1 USD. Six months back we needed 44 INR to buy 1 USD. Now we need 52 INR to buy 1 USD. Think of all the cool things that you could buy from the U.S. How about an Amazon Kindle or an iPad? All these would now cost around 13 per cent more. We say that during the last six months, the INR has “weakened” or “depreciated” against the USD. On the other hand, we can also say that the USD has “appreciated” or “strengthened' against the INR.

Young World Money-Wizards Quiz 3

Let us assume that the transportation cost of the Big Mac between India and the U.S is zero. Given the information in the Money Trivia, what do you think will happen? How will the USD-INR exchange rate change on account of that?

Email your answers to youngworld@money-wizards.com. The first four correct answers and the most articulate answer within seven days will each be awarded flipkart evouchers worth Rs. 250. The results and the answers will be published at www.Money-Wizards.com after seven days.

Money Trivia

The Economist magazine came out with an interesting concept in 1986 called the “Big Mac Index”. It takes the price of a Big Mac, the burger sold by McDonald's in different cities of the world, which is then converted using the current exchange rate to see how different the prices are, when measured using a single common currency. In the U.S, the average price of a Big Mac is $4.07. In India, it is around Rs 84.00 — that is around $1.6!

About Money-Wizards: Money-Wizards is a company in financial literacy and money education. They conduct workshops and after school classes on money education for students. If you want Money-Wizards programmes in your school or neighbourhood, write to Info@Money-Wizards.com