The foreign exchange market allows participants to exchange currencies. It consists of banks, companies, central banks, investment firms, and retail investors and brokers. The market determines relative currency values through supply and demand, rather than setting absolute values. It functions to transfer purchasing power between countries, provide credit to promote international trade, and offer hedging facilities to protect against exchange rate risks. Currency valuations depend on inflows and outflows. Equilibrium exchange rates are determined by the intersection of supply and demand curves. Exchange rates fluctuate due to economic factors like balance of payments, interest rates, inflation, government debt, speculation, and recessions. Fluctuations impact trade, investment levels, economic stability, inflation, and lending.
2. Introduction
The market in which participants are able to buy, sell, exchange and speculate on
currencies.
Made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors.
It does not set a currency's absolute value but rather determines its relative value
by setting the market price of one currency if paid for with another
3. Functions
● Transfer of Purchasing Power: The Primary function of a foreign exchange
market is the transfer of purchasing power from one country to another and
from one currency to another.
● Provision of credit: The foreign exchange market also provides credit to
both national and international level to promote trade.
● Provision of Hedging Facilities: By hedging, we mean covering of a foreign
exchange risk arising out of the changes in exchange rates. It tries to
protect the interest of people dealing in the market from any unforeseen
changes in the exchange rate.
4. Supply-Demand of Foreign Exchange
Currency valuations are determined by the
flows of currency in and out of a country. A
high demand for a particular currency
usually means that the value of that
currency will increase.
5. Equilibrium in
Foreign
Exchange
After deriving the demand and
supply curves relating to foreign
exchange, the equilibrium rate of
foreign exchange in the foreign
exchange market is determined
through the point of intersection
between the supply and demand
curves of foreign exchange. The
rate of exchange refers to the rate
at which the currency of one
country can be converted into the
currency of another country.
6. Fluctuations
The value of money is determined by the demand for it, just like the value of
goods and services. Forex traders on the foreign exchange market determine
exchange rates. They take into account supply and demand, and then factor in
their expectations for the future.
7. CAUSES OF FLUCTUATIONS
● Country’s Current Account / Balance of Payments
● Interest Rates
● Inflation Rate
● Government Debt
● Recession
● Speculation
8. Impact of Currency Fluctuations
Slight changes in the value of a currency can send reverberations across the
economy. In fact, some currency fluctuations levels can have drastic effects on
the health of an economy.
Markets like forex and other trading sectors are heavily reliant on how strong or
weak a particular currency is. The strength of a currency can also determine how
a particular country handles international trade.
9. Effect on Market
● Changes the market
competitiveness
● Changes in investment levels
● Creates volatility in the
economy
● Affects inflation
● Affects lending
10. Devaluation of Indian Rupee
Devaluation Meaning: When the external value of the domestic currency
depreciates while the internal value remains the same, such situation is known
as the devaluation of the domestic currency.
At present, the value of India's currency "rupee" is continuously falling and its
value has declined by 12% between January –September 2018. Among the
BRICS nations; after the Russian Ruble, the Indian rupee depreciated the most in
this period.
11. Reasons for
Devaluation
● INCREASING TRADE DEFICIT
IN INDIA
● OUTFLOW OF FOREIGN
CURRENCY
● INCREASE IN PRICE OF CRUDE
OIL
● TRADE WAR BETWEEN CHINA
AND USA