<p>&quot; Does that not mean a lot of rupees flowing into circulation in the country?&quot;  no.  it means other currencies are flowing into the country, eg USD.  then locals will go to their banks and exchange USD for RUPEE.  There will be no new RUPEES created (unless the crazy scenario of all the banks run out rupee and them needing the central bank to print more rupee!).</p>
<p>note that indeed ultimately you could argue that there is more rupees &quot;in circulation&quot;.</p>
<p>and so if the indian economy starts to grow really strongly due to exports, and the fx value of the Rupee starts appreciating, then if you get to a point where real resources start to become scarce, and demand exceeds supply, then certainly you can get inflation, as thats what you get when the economy tries to grow beyond its real resource limits.</p>

CC BY-SA 4.0
2021-05-04T07:50:19.533Z
2021-05-06T21:02:33.633Z
2021-05-06T21:02:33.633Z
Randor
<p>You are wrong/vague here:</p>
<blockquote>
<p>the rupee (INR), is appreciating against, say, the USD, it possibly
means that there is a high demand for the former.</p>
</blockquote>
<p>If the rupee becomes more expensive w.r.t. the dollar, demand for the rupee usually decreases, as Indian exports are now more expensive to pay for when measured in dollars, and hence fewer people seek to convert their dollars to rupees to pay for these exports.</p>

CC BY-SA 4.0
2021-05-06T21:07:15.340Z
if the rupee is appreciating vs the USD , then it could be because speculators see that the rupee is undervalued vs the USD and so it will demand for rupee will continue to be greater than supply and so it will continue to increase until speculators view it as having reached a 'fair' value.  

In short, what i am saying is that the poster's reasoning is possibly correct, one cannot say for sure if the rupee is over or undervalued.  the market will decide.
Randor
CC BY-SA 4.0
2021-05-06T22:12:01.393Z
1. "*it will demand for rupee will continue to be greater than supply*" I never wrote anything to the contrary.
Giskard
CC BY-SA 4.0
2021-05-06T22:13:06.973Z
2. "*one cannot say for sure if the rupee is over or undervalued. the market will decide.*" If the rupee appreciates that literaly means the market decided it was undervalued.
Giskard
CC BY-SA 4.0
2021-05-07T04:57:29.720Z
I don't really see the issue. Demand increases -> Qd increases -> Price increases -> Qd decreases to an equilibrium.
timuzhti
CC BY-SA 4.0
2021-05-07T04:58:34.200Z
@timuzhti I never wrote anything to the contrary. (I only outline the final step, as it was not stated how or why the demand function shifted.)
Giskard
CC BY-SA 4.0
2021-05-07T05:01:27.127Z
I don't see the wrongness with saying "If the INR is appreciating it possibly means that there is a high demand" then. Price increases clearly have the possible antecedent of increased demand.
timuzhti
CC BY-SA 4.0
2021-05-07T05:07:19.693Z
@timuzhti I see your meaning, I was thinking more about the indirect effect of the change in the exchange rate. Without additional details on the reasons behind the change, it is impossible to grasp the general picture, which is why I write "wrong/vague".
Giskard
CC BY-SA 4.0
2021-05-04T06:45:03.437Z
2021-05-04T06:45:03.437Z
Giskard
<p>If a currency, e.g. the rupee (INR), is appreciating against, say, the USD, it possibly means that there is a high demand for the former. India could have net exports, high remittances, increasing FIIs all leading to the appreciation of the INR. Does that not mean a lot of rupees flowing into circulation in the country? Should that not decrease the value of the currency and lead to inflation? Where exactly am I wrong?</p>

<macroeconomics><finance><nonexpert><foreign-exchange><currency-exchange>
Can an appreciating currency lead to inflation?
Tomahawk
# Can an appreciating currency lead to inflation?

(Asked by: username_0 on 2021-05-04)

If a currency, e.g. the rupee (INR), is appreciating against, say, the USD, it possibly means that there is a high demand for the former. India could have net exports, high remittances, increasing FIIs all leading to the appreciation of the INR. Does that not mean a lot of rupees flowing into circulation in the country? Should that not decrease the value of the currency and lead to inflation? Where exactly am I wrong?

**Tags:** macroeconomics, finance, nonexpert, foreign-exchange, currency-exchange


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## 2 answers

### Answer by username_2 on 2021-05-04. Score: 3 | Accepted answer

You are wrong/vague here:

> the rupee (INR), is appreciating against, say, the USD, it possibly
> means that there is a high demand for the former.

If the rupee becomes more expensive w.r.t. the dollar, demand for the rupee usually decreases, as Indian exports are now more expensive to pay for when measured in dollars, and hence fewer people seek to convert their dollars to rupees to pay for these exports.

> **Comments:**
> **username_1**: if the rupee is appreciating vs the USD , then it could be because speculators see that the rupee is undervalued vs the USD and so it will demand for rupee will continue to be greater than supply and so it will continue to increase until speculators view it as having reached a 'fair' value.    In short, what i am saying is that the poster's reasoning is possibly correct, one cannot say for sure if the rupee is over or undervalued.  the market will decide.  
> **username_2**: 1. "*it will demand for rupee will continue to be greater than supply*" I never wrote anything to the contrary.  
> **username_2**: 2. "*one cannot say for sure if the rupee is over or undervalued. the market will decide.*" If the rupee appreciates that literaly means the market decided it was undervalued.  
> **username_3**: I don't really see the issue. Demand increases -> Qd increases -> Price increases -> Qd decreases to an equilibrium.  
> **username_2**: @username_3 I never wrote anything to the contrary. (I only outline the final step, as it was not stated how or why the demand function shifted.)  
> **username_3**: I don't see the wrongness with saying "If the INR is appreciating it possibly means that there is a high demand" then. Price increases clearly have the possible antecedent of increased demand.  
> **username_2**: @username_3 I see your meaning, I was thinking more about the indirect effect of the change in the exchange rate. Without additional details on the reasons behind the change, it is impossible to grasp the general picture, which is why I write "wrong/vague".  

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### Answer by username_1 on 2021-05-04. Score: 1

" Does that not mean a lot of rupees flowing into circulation in the country?" no. it means other currencies are flowing into the country, eg USD. then locals will go to their banks and exchange USD for RUPEE. There will be no new RUPEES created (unless the crazy scenario of all the banks run out rupee and them needing the central bank to print more rupee!).

note that indeed ultimately you could argue that there is more rupees "in circulation".

and so if the indian economy starts to grow really strongly due to exports, and the fx value of the Rupee starts appreciating, then if you get to a point where real resources start to become scarce, and demand exceeds supply, then certainly you can get inflation, as thats what you get when the economy tries to grow beyond its real resource limits.


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