REASON IN FLUCTUATION OF EXCHANGE RATE

Exchange rate means value of one currency in term of other. For instance 1 USD = INR. This is dollar – rupee exchange rates and indicates the value of Indian rupees per unit of dollar. 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 country’s trade and its macroeconomic policies. The following reason is responsible for fluctuating in exchange rate:

 

  1. INTEREST RATE:

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

 

  1. MONEY SUPPLY AND INFLATION:

At the time central bank of country will print more money, the supply of money will increase in the market. Resulted purchasing power of customer also will increase and resulted it will invite inflation situation. And as we know in inflation time home country’s currency value will be weak and may be causes depreciate.

 

  1. BALANCE OF TRADE:

When in country’s 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. In surplus trade country’s foreign reserve increase.

 

  1. ECONOMIC GROWTH:

High economy and fastest growing economy country push FII from weak economy and developing countries. In this case they will sell their currency (weak economy) and buy the other currency (strong economy). In this case if country’s currency will face more supply and less demand value of currency will fall.

 

  1. FOREIGN DEBT:

many developing and under developing borrowed the fund from international bank like IMF, world bank and ADB etc. but this is unplanned borrowing . At current time it adds in balance of payment but if we talk about future its obligation to pay the fund with interest rate. And therefore it has seen the country which has taken more borrowed fund their value depreciates in future.

Contributed by -
Brijesh Mishra,
BMS, Mumbai University

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~ by rishabhjain1601 on August 30, 2009.

2 Responses to “REASON IN FLUCTUATION OF EXCHANGE RATE”

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