Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.

com

REASON IN FLUCTUATION OF EXCHANGE RATE

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com

Exchange rate means value of one currency in term of other.

For instance 1 USD = 53 INR. This is dollar rupee exchange rates and indicates the value of Indian rupees per unit of dollar.

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But this exchange rate does not stable.

Basically fluctuation is caused by demand and supply of the currency. The demand and supply generally affected by countrys trade and its macroeconomic policies.

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In simple words when the demand for one currency increases its value increase and when its supply increases currency depreciates.

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Following are some of the reasons for fluctuation in exchange rates

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INTEREST RATE

When interest rate in home country is higher than other country, more foreign investor will be attracted to invest in home country to make capital gain. In this case demand for home countrys currency will increase and may cause it to appreciate.

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BALANCE OF TRADE

When in countrys balance of payment the export is greater than import we call there is surplus. Normally it has seen the country which face the surplus there currency value increase than country which make deficit.
The other way to look at it is that when exports are more than imports, more importers will sell foreign currency that received by exporting which increases demand for home currency which results in appreciation of currency.

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MONEY SUPPLY AND INFLATION

At the time central bank of country will print more money, the supply of money will increase in the market. Which results in increase in purchasing power of customer also and which ultimately increases inflation.
Since inflation and currency value are inversely related, with increase in inflation currency depreciates.

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ECONOMIC GROWTH

When the economic growth of a country is high FII would divert there investment to such growing economy by selling their investments in other countries, which increases supply of currencies of those countries of which FIIs are selling investment causing it to depreciate and the currency of country, in which FIIs are diverting their investment, appreciates.

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FOREIGN DEBT

With borrowing comes an obligation to repay the money along with interest. So when a country borrows more foreign debt it need more foreign currency to repay that loan, which makes it to sell more home currency to buy foreign currency resulting in depreciation of home currency.

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Basically all these factors are linked to each other. For example: When home currency appreciates too much that affects exporters because now when they receive their payments in foreign currency, after it conversion in home currency they receive less amount because of increased home currency value. At this point RBI intervenes and sells home currency to reduce its value, now when RBI is selling home currency it increases supply of home currency which results in inflation, now to control inflation RBI increases interest rates, as interest rates increases it affects economic growth as it increases cost of borrowing, so companies prefer to borrow from foreign markets as its cheaper than home loans which results in increased foreign debt, which disturbs balance of payment.

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