5/26/2023 0 Comments Rs exchange rates![]() ![]() To understand why currency fluctuations take place, it is important to have the knowledge about Floating Exchange Rate.Ĭurrency prices for any Economy can be determined in two ways: a floating exchange rate or a fixed exchange rate. Interest Rates – The exchange rate levels and the position of the domestic currency is one of the key factors taken into consideration by most central banks while formulating the monetary policy.A decline in the value of the domestic currency may result in imported products costing higher. Inflation – In countries that are substantial importers, a devalued currency may result in inflation.If a nation doesn’t have a stable currency, investors will be reluctant due to the exchange losses inflicted by depreciation of the currency. Capital Flows – Countries with strong government, dynamic economies and stable currencies tend to attract higher flow of foreign capital.Therefore, net exports are inversely related to to the strength of the domestic currency. This equation makes it clear that higher imports will result in a lower GDP. Economic growth – The GDP of an economy is calculated with the formula C+I+G+(X-M) where ,.A weaker currency will cause more exports and make imports expensive thereby decreasing a nation’s deficit overtime. Merchandise trade – It refers to nation’s exports and imports or it’s international trade.The fluctuations in a country’s currency has a direct impact on the following aspects of the country’s economy – RBI has been actively intervening in the foreign exchange market during the times of appreciation of the Indian Rupee Exchange Rate by purchasing foreign exchange currency and following a hands off approach during times of depreciation of Indian Rupee. To achieve this, RBI has used multiple combinations of tools including sales and purchase of currency, adjustment of domestic liquidity through Bank Rate, Cash Reserve Ratio (CRR), Repo rate etc. Against this background, the exchange rate management policy of the Reserve Bank of India aimed at maintaining stability in the conditions in the foreign exchange market by removing lumpy demand and supply, preventing speculative attacks, without setting a specific exchange rate. This resulted in a rise in the volatility of the Indian Rupee. Many trade and financial liberalization measures were undertaken which resulted in a rise in total turnover in the foreign exchange market. The crisis in 1991 compelled the Reserve Bank of India to implement some market oriented financial reforms which was a huge shift from fixed to a market based exchange rate system in March of 1993. Indian Rupee Exchange Rateīefore the huge crisis of Balance of Payments in 1991, the Indian Rupee was pegged to a basket of currencies dominated by the US dollar. Since these factors are constantly fluctuating, the value of one currency with respect to another keeps fluctuating every moment. The Foreign Exchange Rate of one currency against another is influenced by numerous factors. ![]() The rate at which one currency will be exchanged for another one is exchange rate between two currencies, known as the F oreign Exchange Rate or Forex Rate. You can also download this article as PDF for future offline reference.
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