Determinants

impacting foreign
exchange price
table of
CONTEN
T
 OBJECTIVES

To compare Indian currency with various other factors

To study the determinants impacting foreign exchange

rate
 INTRODUCTIO
N
Foreign exchange, or forex, is the conversion of one country's currency into another. In a free
economy, a country's currency is valued according to the laws of supply and demand. In other
words, a currency's value can be pegged to another country's currency, such as the U.S. dollar,
or even to a basket of currencies.
Foreign exchange is traded virtually 24X7. Forex is the world’s largest market. Everyday trillions
of dollars of transactions are done. The foreign exchange financial market is the most liquid in
the world. Traders in this market involve several institutions. The institutions could be the
government, central banks and commercial banks. It would also involve institutional investors,
forex agents, individuals, and other businesses.
Factors affecting foreign exchange are:-
1. Interest rates
2. inflation rates.
3.Current account deficits
4.Government debt
5.Economic performance
6.Recession
 INFLATION
RATE
Inflation is the rate at which prices for goods and
services rise.
The most commonly used inflation indexes are the
Consumer Price Index and the Wholesale Price Index.
Currency and Inflation rate have inverse
relationship Price rise but the value of money falls
and vice versa Lowering purchasing power of the
consumers
 USDINR
CHART
As Inflation falls USDINR rises
between 2018-2019
From

2018

to

2022

,
 EXPORTS &
IMPORTS
Export Import play an important role in developing
ones country . Generally , Developing countries
have more imports than export and vice versa.
The economy of a country is not diversified and
depends mainly on the export of raw materials,
then, in case the world commodity prices fall (oil,
gas, gold, etc.), the national currency rate will fall
as well.
 USDINR
CHART
Rising Imports
leads to
depreciating
Indian currency
against USD

IMPORTS
 USDINR
CHART
Exports consolidating
but imports rising
leading to
depreciating Indian
currency

EXPORT
S
 INTEREST RATE

Keeping all other factors constant, an increase in interest rate would case the value of a
currency to rise

This is because higher interest rates in a particular currency offer investors (those
who buy a currency) a higher return relative to other currencies.

In an idealised example, when interest rates rise, investors are attracted to a

currency and invest in it more heavily. As more investors are attracted, demand for
the currency increases, and its value goes up.

The opposite relationship is true for decreasing interest rates. That is, lower interest
rates tend to decrease the value of a currency.
 INTEREST RATE
INR EUR
Interest Rate Value of Currency 0.014
0.0126 0.0126
0.012 0.0113 0.0115

0.01
Interest Rate 0.008
7.00%
6.50%
6.25% 0.006
6.00%
5.15% 0.004
5.00%
0.002 0.0017
4.00% 4.00%
4.00%
0
2018 2019 2020 2021 2022
3.00%
INR EUR
2.00%

1.00%

0.00%
2018 2019 2020 2021 2022
Interest Rate
 RECESSION

In the event a country's economy falls into a recession, its interest rates
will be dropped.

Falling interest rate would reduce the 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.
 BALANCE OF PAYMENTS
The balance of payments of the country is the cash
flow in the form of payments received and paid by the
country.
When the balance of payments is active, the demand
for national currency rises, and the rate rises as well.
In case of the passive balance of payments, increases
the demand for a foreign currency, thus the rate of a
national currency decreases.
 BALANCE OF PAYMENTS

CURRENT ACCOUNT
BALANCE
INDIA

USD INR
CHART
POLITICAL STABILITY AND
PERFORMANCE
A country's political state and economic performance
can affect its currency strength.
A country with stable political power are likely to
attract more foreign investors as compared to
country with instable political power.
Increase in foreign capital, in turn, leads to an
appreciation in the value of its domestic currency.
 PUBLIC DEBT
Public debt refers to a country’s government borrowings to deploy
funds in various infrastructure and other development projects.
The higher a country’s public debt, the higher the chances of the
economy entering into inflation in the long run.
Take, for example, the situation that we are seeing in Sri Lanka. The
country continued to have large public debts, and this kept foreign
investors at bay.
As the country could not attract more foreign investors, it started
entering into a further debt trap, resulting in its complete inability
to repay and resulting impact on its exchange rate.
Now, as the country’s inflation is out of control, it continues to
pose a threat to foreign investors since its exchange rate has
weakened.
 SPECIAL FACTORS

In the year 1998, when Government of India conducted

“Pokhran Nuclear Test” rupee value depreciated around 85 paise
in a day and 125 paise in seven days.

In the year 2000,India faced Kargil war, which also affected the
market. By this war the defense expenditures were raised and
due to that there was increase in the fiscal deficit and this
became an obstacle in the growth of the economy
 CONCLUSION
Internal and external factors

Import of Energy and

technology Dollar Index
Indian currency
Inflation