Attracted by the Share Market Situation in India, American Investors Are Buying Indian Shares

1. Attracted by the share market situation in India, American investors are buying Indian shares.

Interest Rate: A demand for a currency is hugely dependent on the interest rate differential between two countries. A country like India where interest rate is around 7-8% experiences greater capital inflow as investors get better return than what they might get in US. (Interest rates of 2-3%). This results into rupee appreciation and to the depreciation of dollar and the supply curve of dollar will shift to the right

Impact on American investors: If a foreign investor invests in Indian stock market and even if its value doesn’t change in 1 year, he’ll earn profit if rupee appreciates and make a loss if it depreciates. You can understand this with an example:

Suppose the foreign institutional investor Invests Re. 1 Cr. in the Indian stock market, at an exchange rate of $1 = Rs50. So, the amount invested is $200,000.Suppose, after 1 year, even if the value of investment doesn’t appreciate the foreign investor can earn a profit if the exchange rate has changed to $1 = Rs40 (Rupee appreciation). If the investor sells his investment and converts the currency, he would get $ 250,000. So, he would earn $ 50,000 as a profit thanks to a change in the exchange rate i.e. rupee appreciation. So, a continuously appreciating rupee would lead to greater investment by the foreign institutional investor

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Capital Flows -  

Inflows – When NRI or foreign Institutional investors invests in Indian shares, It results in Indian rupee appreciates and dollar depreciation as these inflows are added in the account of the balance of payments. It means that export is less than the import of goods and hence it lead to a situation of deficit on current account. So, this deficit is meet by surplus cash inflow to maintain an equilibrium

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Outflows – When Indians invest in abroad companies, the capital outflows leading to depreciating Indian rupee and appreciating dollar and is noted under current account of the balance of payment. So, surplus cash outflows take place to maintain an equilibrium

2. Demand for Darjeeling Tea is increasing in Canadian market

Inflation Rate: The demand for a Darjeeling Tea by the Canadian market would be more if the inflation rate is lower in India as compared to other countries. Higher demand for Darjeeling tea would mean higher demand for the Canadian dollar resulting in the appreciation of Canadian dollar. As per the current trend, the Inflation rate of Indian rupee is high which will lead low rate of export as compared to before and it will implies to low inflow of Canadian dollar leading to depreciation of Indian rupee and appreciation of Canadian dollar