Managing Uncertainty- How does the dollar affect the diamond industry Essay

Managing Uncertainty- How does the dollar affect the diamond industry in India - Essay Example In 2011, the amount of uncut diamonds was 120 million carats; as compared to the 150 million carats in 2007. This decline is alarming and is an issue of concern that needs to be addressed. The impact of the dollar on the diamond market in India Based on the complicated and complex forms of uncertainties, one can conduct an analysis of the impact that the fluctuation of the dollar has had on the diamond market in the United States. Before the 1990s, the Forex system used to be fixed; however, after the 90s, the Indian government changed the system to a model based on floating rate. The purpose of the fixed rate system was to ensure that rupee fared well against other major world currencies such as Euro, Dollar, as well as GBP. Under the floating rate, the market forces can be regarded as the determinants of supply, as well as demand of the currency. In this case, there is a decline in the value of the currency when demand is less than its supply. When the supply is less than the deman d of the currency, there is an increase in the value of the currency. ... When there are more payments made using dollars as compared to the amount of foreign currency received, what results is a huge supply of the dollar in foreign markets. Consequently, the value of the dollar will fluctuate compared to other world currencies. This has affected the diamond industry in India, which exports some of its diamond products to the United States (Poros 2011, p.65). The other reason why the dollar has witnessed massive fluctuation is because of the huge amounts of U.S dollars in foreign markets such as India. This high amount of the currency has led to its fluctuation, thus affecting the diamond market in India, which uses the US dollar as one of the major currencies while conducting trade. The fluctuation in the value of the dollar also emanates from the huge gap created by the balance of payments deficit. Over time, the U.S dollar has weakened, thus resulting to a huge BOP deficit. The fluctuation in the value of the dollar has also resulted to the reduction in the Foreign Direct Investment in India. This has significantly affected the diamond industry in India since few people wish to invest in the country. The decline in FDI does not attract investors; rather it keeps them away, thus resulting to low investments and little trade in precious commodities such as diamond (Eskeland et al 2003, p.73). The fluctuation of the dollar has also had an impact on traders who either supply the commodity to India, or import it from India after processing. The diamond market in India has also been affected by the diamond industry in China. Whereas India uses the dollar as a primary currency, China does not highly depend on the dollar. As a result, the Indian