Change in Exchange Rates

&
it’s Factors.
Presented by:
Ishika Agarwal- 20191042
Ayush Baranwal- M20191514
Kaushtubh Agarwal- 20191050
Yash Agarwal- 20192261
Jai Sharma- 20191044
 OBJECTIVES
• TO UNDERSTAND THE REASONS FOR FLUCTUATIONS IN THE VALUE OF CURRENCIES.
• TO ENABLE US TO WATCH & ANALYSE EXCHANGE RATE TO DETERMINE THE
ECONOMIC STABILITY OF THE COUNTRY.
• TO UNDERSTAND THE FACTORS THAT INFLUENCE THE VARIATIONS AND
FLUCTUATIONS IN EXCHANGE RATES.
• TO BETTER EVALUATE THE OPTIMAL TIME FOR INTERNATIONAL MONEY TRANSFER.
• TO GET THE BETTER RETURN ON FOREIGN INVESTMENT BY UNDERSTANDING THE
INFLUENCING FACTORS.
What is exchange rate?
Exchange rate is the price of one currency in terms of another currency.it can be
either fixed or floating. Fixed exchange rates are decided by central banks of a
country whereas floating exchange rates are decided by the mechanism of market
demand and supply.
For Example:

 how many U.S. dollars does it take to buy one euro? As of July 31, 2020, the
exchange rate is 1.18, meaning it takes $1.18 to buy €1.
TYPES OF EXCHANGE RATES

 Free Floating
 Restricted Currencies
 Onshore Vs. Offshore
Factors Affecting Exchange Rates

Differentials in Interest Rates

An interest rate is the percentage of principal charged by the lender for the use of its money.
Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest
rates, central banks exert influence over both inflation and exchange rates, and changing interest
rates impact inflation and currency values.
Increases in interest rates cause a country's currency to appreciate because higher interest rates
provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in
exchange rates and vice versa.
Examples

An interest rate hike by the U.S. affects the exchange rate of developing
countries like India.

Also if the central bank cuts interest rates, the returns available for investments
in that country tend to decline and reducing demand for the currency.
In 2008, the Bank of England cut interest rates to a 0.5% record low, in order to
make borrowing cheaper and so aid the economic recovery, that decision caused
a sudden drop in the value of the pound and decrease the number of persons
willing to investor in the country.
 POLITICAL INSTABILITY & ECONOMIC
PERFORMANCE
 ALL EXCHANGE RATES ARE SUSCEPTIBLE TO POLITICAL INSTABILITY AND ECNOMIC
PERFORMANCE.
 A COUNTRY WITH LESS POLITICAL TURMOIL AND STRONG ECONOMIC PERFORMANCE
ATTRACTS MORE FOREIGN INVESTORS.
 A COUNTRY PRONE TO POLITICAL CONFUSIONS MAY SEE A DEPRECIATION IN
EXCHANGE RATES. IT CAUSES A LOSS OF CONFIDENCE IN A CURRENCY AND THE
MOVEMENT OF CAPITAL TO MORE STABLE COUNTRIES.

FOR EXAMPLE: ELECTIONS IN BREXIT IN 2016 BROUGHT DOWN THE VALUE OF BRITISH
POUND QUITE DRAMATICALLY IN A PERIOD OF FEW DAYS.
ALSO, INDIA-CHINA CONFLICTS OFTEN WEAKENS THE INDIAN CURRENCY VALUE.
 Recession
What is Recession?
• According to the National Bureau of Economic Research (NBER), a
recession is a period of declining economic performance across an
entire economy that lasts for several months.
• Decline in industrial production, more unemployment, less real
income, and decline wholesale-retail trade.
How recession affects exchange rates?
• Stock market crashes
• Low interest rates
• Low investments
• Investors pull out their money
• Decrease in cash flow in the economy
Example: 2008 US Recession
US experienced great recession from December 2007 to June 2009.The main
causes of recession were failures in financial regulations, excessive
borrowings by households and Wall Street. Primary cause of recession was
considered as the Subprime Mortgage Crisis. The recession resulted in 2.5
million business is being closed, 8 million people lost their jobs and 4 million
homes were foreclosed every year.
 Public Debt
What is Public Debt?
• When the planned expenditure of the government exceeds its total
revenue, the Government needs to borrow money from individuals and
organizations. This is called public debt.
• Types of Public Debts:
I. Internal Debt
II. External Debt
III. Productive Debt
IV. Unproductive Debt
How Public Debt Affects Exchange Rates?

• Less likely to acquire foreign capital

• Rise in Inflation
• Foreign investors will sell their bonds
• Leading to depreciation in currency
Inflation
 Inflation is a general increase in prices. It is measured by the consumer price index. To calculate
inflation within a country or geographical area, the percentage change in the index between 2
given periods is calculated. This is how we obtain the monthly and annual inflation rate.

Here, CPI x means the initial consumer index.

WHAT CAUSES
INFLATION ?
What causes Inflation?

 1) Government/National/Public Debt
 2) Monetary and Fiscal Policy
 3)
Increasing Consumer Confidence and
Demand
 4) Increase in Input Costs
 5) Currency Devaluation
How Does Inflation Affect the Exchange Rate
Between Two Nations?
The rate of inflation in a country can have a major impact on the value of the
country's currency and the rates of foreign exchange it has with the
currencies of other nations. However, inflation is just one factor among many
that combine to influence a country's exchange rate.

Inflation is more likely to have a significant negative effect, rather than a

significant positive effect, on a currency's value and foreign exchange rate. A
very low rate of inflation does not guarantee a favorable exchange rate for a
country, but an extremely high inflation rate is very likely to impact the
country's exchange rates with other nations negatively.
EXAMPLE
 How inflation affects the exchange rate

 A higher inflation rate in the UK compared to other countries will tend to

reduce the value of the Pound Sterling because:

 High inflation in the UK means that UK goods increase in price quicker

than European goods. Therefore UK goods become less competitive.
Demand for UK exports will fall, and therefore there will be less demand
for Pound Sterling.
 Also, UK consumers will find it more attractive to buy European imports.
Therefore they will supply pounds to be able to buy Euros and Euro
imports. This increase in the supply of pounds decreases the value of
Pound Sterling.
Balance of Payment
 The balance of payments (BOP) is a statement of all
transactions made between one country and the rest of
the world. It is over a defined period of time (quarter or
a year).
 These transactions consist of imports and exports of
goods & services.
 Itdivide transactions in two accounts: the current
account and the capital account.
 Why balance of payment is vital for a country?

A country’s BOP is vital for the following reasons:

•BOP of a country reveals its financial and economic status.
•BOP statement can be used as an indicator to determine whether the country’s currency value is
appreciating or depreciating.
•BOP statement helps the Government to decide on fiscal and trade policies.
•Itprovides important information to analyze and understand the economic dealings of a country with
other countries.
 Balance Of Payment
Current Account Capital Account
Invisible: • Investment (FDI, FII)
Visible:
• Services (+) • Loan (Government,
 Crude oils • Incomes (-) [Profit, ECB)
 Cars Interest and Dividends] • Bank A/C (NRI)
• Transfers (+)
 Mobiles [Remittances, Donations,
 Computers Gifts]
 Gold etc.
 (Import – Export)
 Balance of
Trade= Net
Difference
Between Imports
and Exports
Current Account

 The current account is used to monitor the inflow and outflow of goods and services
between countries.
 This account covers all the receipts and payments made with respect to raw materials
and manufactured goods
  It also includes receipts from engineering, tourism, transportation, business services,
stocks, and royalties from patents and copyrights. When
 When all the goods and services are combined, together they make up to a country’s
Balance Of Trade (BOT).
Capital Account

 All capital transactions between the countries are monitored through the capital account
 Capital transactions include the purchase and sale of assets (non-financial) like land
and properties.
 The capital account also includes the flow of taxes, purchase and sale of fixed assets etc
by migrants moving out/in to a different country.
 The deficit or surplus in the current account is managed through the finance from
capital account and vice versa.
Elements of Capital Account

 There are 3 major elements of capital account:

• Loans & borrowings – It includes all types of loans from both the private and public
sectors located in foreign countries.
• Investments – These are funds invested in the corporate stocks by non-residents.
• Foreign exchange reserves – Foreign exchange reserves held by the central bank of a
country to monitor and control the exchange rate does impact the capital account.
CONCLUSION

These variables decide the unfamiliar conversion scale

vacillations. In the event that you send or get cash
habitually, being state-of-the-art on these elements will
assist you with the ideal time for global cash move. To stay
away from any likely falls in cash trade rates, pick a secured
swapping scale administration, which will ensure that your
money is traded at similar rate in spite of any variables that
impact a horrible vacillation.
THANK YOU