Reasons for exchange rate fluctuation

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comREASON IN FLUCTUATION OF EXCHANGE RATE

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comExchange rate means value of one currency in term of other.For instance 1 USD = 53 INR. This is dollar – rupee exchangerates and indicates the value of Indian rupees per unit of dollar.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comBut this exchange rate does not stable.Basically fluctuation is caused by demand and supply of thecurrency.The demand and supply generally affected by country’s trade andits macroeconomic policies.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comIn simple words when the demand for one currency increases it’svalue increase and when it’s supply increases currencydepreciates.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comFollowing are some of the reasons for fluctuation in exchangerates

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com INTEREST RATEWhen interest rate in home country is higher than othercountry, more foreign investor will be attracted to invest in homecountry to make capital gain. In this case demand for homecountry’s currency will increase and may cause it to appreciate.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com BALANCE OF TRADEWhen in country’s balance of payment the export is greater thanimport we call there is surplus. Normally it has seen the countrywhich face the surplus there currency value increase than countrywhich make deficit.The other way to look at it is that when exports are more thanimports, more importers will sell foreign currency that received byexporting which increases demand for home currency whichresults in appreciation of currency.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com MONEY SUPPLY AND INFLATIONAt the time central bank of country will print more money, thesupply of money will increase in the market. Which results inincrease in purchasing power of customer also and whichultimately increases inflation.Since inflation and currency value are inversely related, withincrease in inflation currency depreciates.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com ECONOMIC GROWTHWhen the economic growth of a country is high FII would divertthere investment to such growing economy by selling theirinvestments in other countries, which increases supply ofcurrencies of those countries of which FII’s are selling investmentcausing it to depreciate and the currency of country, in which FII’sare diverting their investment, appreciates.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com FOREIGN DEBTWith borrowing comes an obligation to repay the money alongwith interest. So when a country borrows more foreign debt itneed more foreign currency to repay that loan, which makes it tosell more home currency to buy foreign currency resulting indepreciation of home currency.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comBasically all these factors are linked to each other.For example:When home currency appreciates too much that affects exporters because nowwhen they receive their payments in foreign currency, after it conversion inhome currency they receive less amount because of increased home currencyvalue. At this point RBI intervenes and sells home currency to reduce it’svalue, now when RBI is selling home currency it increases supply of homecurrency which results in inflation, now to control inflation RBI increases interestrates, as interest rates increases it affects economic growth as it increases costof borrowing, so companies prefer to borrow from foreign markets as it’scheaper than home loans which results in increased foreign debt, whichdisturbs balance of payment.

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Roshankumar S Pimpalkar

Reasons for exchange rate fluctuation

by Roshankumar Pimpalkar

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