It is given that imports constitute demand for foreign exchange as payments for imports are made in foreign exchange only. How ever, exports have also been given as a component of supply of foreign exchange.My doubt is, our country's exports are some other country's imports,so the country importing our goods will pay in Rupees.So,how can we consider exports as a component of supply of foreign exchange?
Shri Lakshmi,
You are right that imports constitute demand for foreign exchange as payments for imports are made in foreign exchange only. And also, exports are considered as a component of supply of foreign exchange. Let me clear your doubt with the help of an example. Suppose there are two countries involved in the exchange of goods and services, say, India and US. Now let us suppose that India is importing good X from US, so it needs to make payment in terms of US $, so it creates demand for foreign exchange. On the other hand, if India exports good Y to US, it expects US to pay in rupee terms. The question arises how US will get the rupee currency. US will convert the dollars into rupees with the help of RBI. So, the supply of foreign exchange indirectly reached in the exporting country. Thus, we can say that exports are a component of supply of foreign exchange.
You are right that imports constitute demand for foreign exchange as payments for imports are made in foreign exchange only. And also, exports are considered as a component of supply of foreign exchange. Let me clear your doubt with the help of an example. Suppose there are two countries involved in the exchange of goods and services, say, India and US. Now let us suppose that India is importing good X from US, so it needs to make payment in terms of US $, so it creates demand for foreign exchange. On the other hand, if India exports good Y to US, it expects US to pay in rupee terms. The question arises how US will get the rupee currency. US will convert the dollars into rupees with the help of RBI. So, the supply of foreign exchange indirectly reached in the exporting country. Thus, we can say that exports are a component of supply of foreign exchange.