The document discusses macroeconomic indicators that influence exchange rates, including inflation rates, interest rates, recessions, government debt, current accounts, terms of trade, and political stability. It notes that exchange rates are a key indicator of a country's economic health and are impacted by factors like inflation differentials between countries, interest rates, and trade balances. The document also provides an overview of open economy identities and multipliers.

1. MACRO ECONOMIC
INDICATORS INFLUENCING
EXCHANGE RATES
Dr. Mohamed Kutty Kakkakunnan
Associate Professor
P G Dept. Of Commerce
N A M College Kallikkandy
Kannur – Kerala - India

2. Macro-economic indicators /
Factors that Influence Exchange Rates
• Exchange rates are one of the most watched and analyzed
economic measures across the world
• A key indicator of a country's economic health
• The exchange rate can be defined as the rate at which one
country's currency may be converted into another
• Rates are not just important to governments and large
financial institutions
• Also matter on a smaller scale, having an impact on the
real returns of an investor's portfolio

3. • There are several forces behind exchange rate movements
• Strong currencies make a nation's exports more expensive
and imports from foreign markets cheaper, whereas weaker
currencies make exports cheaper and imports more expensive
• Higher exchange rates adversely affect a country's balance of
trade but lower exchange rates have a positive effect on it
• Following are the main factors that cause changes and
fluctuations in exchange rates and outlines the reasons for
their volatility

4. 1. Inflation Rates
 Changes in inflation cause changes in currency
exchange rates
 A country with a comparatively lower rate of inflation
experience an appreciation in the value of its currency
 The price of goods and services increases at a slower
rate when inflation is low
 Countries with a continually low inflation rate exhibit an
increasing currency value, whereas a country with
higher inflation typically experiences depreciation of its
currency and this is usually accompanied by higher
interest rates.

5. 2. Interest Rates
 Any increase in a country's interest rate causes its currency to
increase in value as higher interest rates mean higher rates to
lenders, thus attracting more foreign capital, which in turn,
creates an increase in exchange rates
 Interest rates, inflation and exchange rates are all correlated.
 Central banks can influence both inflation and exchange rates by
manipulating interest rates.
 Higher interest rates offer lenders a higher return compared to
other countries.

6. 3. Recession (decline)
 In the event a country's economy falls into a recession, its interest
rates will be dropped, hindering its chances of acquiring foreign
capital.
 The consequence of this is that its currency weakens in
comparison to that of other countries, thereby lowering the
exchange rate.
4.Government Debt
 Government debt is public debt or national debt owed by the
central government
 Countries with large public deficits and debts are less attractive to
foreign investors and are thus less likely to acquire foreign capital
which leading to inflation.
 Foreign investors will forecast a rise government debt within a
particular country.
 As a result, a decrease in the value of this country's exchange rate
will follow.

7. 5. Current Account / Balance of Payments
 A country's current account reflects its balance of trade and
earnings on foreign investment
 It comprises of the total number of transactions including
exports, imports and debt
 A deficit in its current account comes as a result of spending
more of its currency on importing products than through exports
 This has the effect of lowering the country's exchange rate to the
point where domestic goods and services become cheaper than
imports, thereby generating domestic sales and exports as the
goods become cheaper on international markets.

8. 6. Terms of Trade
 Terms of trade relate to a ratio which compares export prices to import
prices
 If the price of a country's exports increases by a higher rate than its
imports, its terms of trade will have improved
 Increasing terms of trade indicate a greater demand for a country's
exports
 This, in turn, results in an increase in revenue from exports which has the
effect of raising the demand for the country's currency and an increase in
its value
 In the event the price of exports rises by a lower rate than its imports, the
currency's value will decline in comparison to that of its trading partners

9. 7. Political Stability and Performance
A country's political state and economic performance can
affect the strength of its currency.
A country with a low risk of political unrest is more
attractive to foreign investors, drawing investment away
from other countries perceived to have more political and
economic risk.
An increase in foreign capital leads to the appreciation in
the value of the country's currency, but countries prone to
political tensions are likely to see a depreciation in the rate
of their currency

10. Open Economy Identity
 On the basis of trade relationship with other countries,
economy can be divided into two
1. Open economy and
2. Closed economy
Where export and import constitute a major part of the
GDP of a country, it termed as open economy.
Such countries allow more or less open their
boundaries for trade and commerce
No trade restriction or barriers in such countries
Closed economy, import and export constitute only a
small share in their GDP

11.  Every country tries to maximize their export
 Increased export results in increase share of
international trade in GDP and the economy become
more and more open
 Export increase increase in production
Increase employment and income of persons associated
with export trade increase in demand
Thus, increase in export leads to increase the national
income
But increase in demand depends upon the marginal
propensity to save (MPS) and marginal propensity to
import (MPM)
MPS – change in saving due to a per unit change in income
MPM – change in import due to a per unit change in
production

12. The national income identity of an open economy can
be described as
Y = C + I + X – M
Where, Y = National income; C = Consumption;
I = Total investment; X = Export and M = Import
The above equation can be transformed into
Y - C = S = I + X – M
S + M = I + X
The above equation shows that, at equilibrium levels
of income the sum of savings and imports (S+M)
will be equal to investments and exports (I+X)

13. Further,
In an open economy there will be domestic
investment (Id) and foreign investments (If)
Since I = S
I = Id + If
Foreign investment (If) will be equal to the
difference between imports and exports
If = X – M
And
Id + X – M = S or
Id + X = S+ M
This is the equilibrium condition of national
income and in an open economy

14. Open Economy Multiplier
The concept of multiplier was developed by RF Kahn, latter it was
popularized by Keynes and then by Fritz Machlup
Multiplier is the coefficient relating and increment in output (return
or income) to an increment of investment
Open economy multiplier relates the increase in GNP due to increase
in export
The open economy multiplier depends upon the Marginal propensity
to save (MPS) and marginal propensity to import (MPM)
MPS means increase in savings for a per unit increase of income
MPM means the increase in import for a per unit increase in output
(GNP).
If there is no foreign trade MPM will be zero and then multiplier will
be 1/MPS.

15. • open economy there will be foreign trade, and Open
economy multiplier will be
• Eg: suppose MPS = 0.3 and MPM = 0.2, then increase in GNP
due to an increase in export of Rs. 1000 will be
• 1000 X = 1000 x = 1000 X 2 = Rs. 2000
Assumptions Under Multiplier Effect
1. Both domestic prices and exchange rates are fixed
2. The economy is operating at less than full employment so
that increase in demand result in an expansion of output
3. The authorities adjust the money supply to changes in
money demand by changing the interest rate

16. SWIFT
dr. mohamed kutty kakkakunnan
associate professor
p g dept. oF commerce
n a m college kallikkandy - kannur

17. SWIFT
The Society for Worldwide Inter-bank Financial
Telecommunication (S. W. I. F. T.) is a worldwide
community of financial institutions to provide
communications solutions to enable inter-operability
between its members, their market infrastructures and
their end-user communities.
It is a messaging network that financial institutions use to
securely transmit information and instructions through
a standardized system of codes
It is the industry-owned cooperative supplying secure
messaging services and interface software to different
kinds of financial institutions throughout the world
It provide reliable facilities for exchange of financial
messages all over the world

18. SWIFT is an industry-owned limited liability cooperative
society set up under Belgian Law and controlled by its
member banks (including central banks) and other financial
institutions
SWIFT’s business is to supply secure messaging services and
interface software, to contribute to greater automation of
financial transaction processes and to provide a forum for
financial institutions to address issues of common concern
in the area of financial communication services.
Messaging services are provided to banks, broker/dealers and
investment managers, as well as to market infrastructures
in payments, treasury, securities and trade

19. SWIFT was founded in Brussels in 1973 under the
leadership of its inaugural CEO Carl Reuterskiold,
supported by 239 banks of fifteen countries. Being a
communication network, the first message was sent
in 1977
During 2014, it has more than 10,800 live users from
more than 200 countries and territories and has
communicated over 5.6 billion messages

20. The basic objectives of SWIFT are –
• To provide low-cost, competitive financial processing and
communication services of the highest security and
reliability to its members
• To contribute significantly to the commercial success of its
members through greater automation of the end-to-end
financial transaction process, based on its leading expertise
in message processing and financial standards setting
• To act as an international open forum for the world's
financial institutions to address industry-level threats,
issues and opportunities.
• To Employ and recruit the best people, invest in the most
beneficial resources, and become a leading global
organization respected for its professionalism,
effectiveness, vision and management.

21. Services Offered by SWIFT
• Applications—SWIFT connections enable access to a variety of
applications which include real-time instruction matching for
treasury and forex transactions, banking market Infrastructure
for processing payment instructions between the banks, and
securities market infrastructure for processing clearing and
settlement instructions for payments, securities, forex, and
derivatives transactions.
• Business Intelligence —SWIFT has introduced dashboards
(control panel) and reporting utilities which enable the clients to
get a dynamic, real-time view of monitoring the messages,
activity, trade flow, and reporting.
These reports enable filtering based on region, country, message
types, and related parameters.

22. • Compliance Services — Aimed at services around financial
crime compliance, SWIFT offers reporting and utilities like
Know Your Customer (KYC), Sanctions, and Anti-Money
Laundering, funding for terrorist operations etc.
• Messaging, Connectivity, and Software Solutions —The core
of SWIFT business resides in providing a secure, reliable, and
scalable network for the smooth movement of messages.
Through its various messaging hubs, software, and network
connections, SWIFT offers multiple products and services
which enable its end clients to send and receive transactional
messages.

23. Who Uses SWIFT?
• In the beginning, SWIFT founders designed the network to
facilitate communication about Treasury and correspondent
transactions only. At present it provides services to the
following:
• Banks,
• Brokerage Institutes and Trading Houses
• Securities Dealers
• Asset Management Companies
• Clearing Houses
• Depositories
• Exchanges
• Corporate Business Houses
• Treasury Market Participants and Service Providers
• Foreign Exchange and Money Brokers

24. Operations of SWIFT in India
S.W.I.F.T. User Group is formed in India with the Chairman IBA
as the Chairperson and the Chief General Manager-in-
Charge, Department of Information Technology, Reserve
Bank of India as the Alternate Chairperson. Currently there
are 92 institutions comprising of banks, brokers and
dealers, central depositories and clearing organisations,
who are the user members of S.W.I.F.T. in India :
• Members 48
• Sub-Members 36
• Brokers & Dealers 1
• Central Depositories and Clearing 1
• Non Shareholding Banks 5
• Representative Offices 1
• Total 92