First of all you should understand that the value of currency going down (against other currencies) doesn't always reflect a weak economy. Similarly, an always appreciating currency doesn't indicate a healthy economy. Both has their own advantages and disadvantages. The factor which is bad for a country's currency is huge fluctuation of its value in the international markets. Fluctuations reflect instability of the economy and other countries lose confidence in an ever fluctuating economy.
There are many factors which are responsible for the value of the currency. Among them the key factors are inflow of foreign investments (demand for domestic currency), balance of trade (net of imports and exports), foreign remittances (inflow of foreign currency), inflation, gross domestic product, monetary policy, global events etc.
Currency is a commodity. The basic principle which determines price of a commodity is demand and supply. Similarly, the value of a nation's currency is determined by the demand and supply of that particular currency in the international market. Thus the only mean of increasing the value of the currency is to generate more demand for that currency.
The central bank of each country closely monitor the value of the currency in the international market and intervenes as and when required to arrest any significant slide or steep appreciation. The advantages of an appreciating currency are as follows:
Imports getting cheaper: Due o higher demand of the currency in the international markets, the exports will get dearer while imports will become cheaper. In case of a country is highly dependent on imports, it will help them in building raw material reserves.
The major disadvantages are as below:
Lower domestic output:Due to higher prices in the market, the products of the country will become costlier. Lower demand will eventually pull down the demand of the products (if it is more elastic) resulting in lower output.
More incentives for export promotion: As exports become costlier, the factories need to add more incentives to make the products more attractive.
Eroding value of expatriated profits:The value of earnings of companies operating outside the country will deplete as the value will be less in terms of domestic currency.
Measures taken by the central bank to increase value of currency:
Mopping up foreign currency (Dollar in case of Indian Rupee) from the currency market:RBI buys dollar from the currency market in order to arrest depreciation.
Building conducive environment for foreign investments: This is the most important factor for currency appreciation. Various government policies which determines foreign investments levels are responsible for making a favorable investment environment. Higher levels of foreign investments will make the currency appreciate.
There is very less common people can do to increase value of currency in short term. However, in longer term, higher remittances from foreign countries etc can help currency appreciations. On the other hand, avoidance of speculation of importers in the currency markets in anticipation of currency depreciation may help appreciation of the currency.
Tulika Devi Nath