Question

Why is Foreign Exchange demanded ?

Hint:

There is an inverse relationship between the exchange rate and the demand for foreign exchange. If the dollar gets cheaper, Indians will demand more dollars to import more goods.

Answer 1

Step 1: Understanding the Concept:
The demand for foreign exchange arises because domestic currency is not accepted for transactions in other countries.
Step 2: Detailed Explanation:
The major sources of demand for foreign exchange are:
1. Imports: To pay for goods (like oil or machinery) and services (like software) purchased from other countries.
2. Tourism: Indian residents traveling abroad need foreign currency for their expenses.
3. Unilateral Transfers: Sending gifts, grants, or remittances to family members living in foreign countries.
4. Purchase of Assets: Buying shares, bonds, or real estate in foreign nations.
5. Speculation: People buy foreign currency if they expect its value to rise in the future, hoping to sell it later for a profit.
Step 3: Final Answer:
Foreign exchange is needed to settle international debts, finance imports, and facilitate overseas investment and travel.