How is the value of rupee determined against dollar, euro etc in the international money market
Categories: Finance
How is the value of rupee determined against dollar, euro etc in the international money market
The price of the currency of any country is based on the basic principle of the economy, demand and supply. In the foreign exchange market, the currency which is in high demand also has a high price and the currency which is in low demand also has a low price. This is a fully automated process. The determination of the value of rupee against dollar also depends on many factors such as:
1. On the basis of inflation
In the US in general the inflation has been lower than in India and thus the rupee depreciates.
2. On the basis of demand for dollars
If the demand for dollars in India increases and its supply decreases, then the value of dollars will increase. Thus in the international money market the value of the rupee falls against the dollar, euro etc.
3. Based on the state of the economy
If the economy of the country is not running properly then there will be less foreign investment and foreign investors will start leaving the country.
4. Based on Current Account Deficit:
If the current account deficit of a country is high, then that country will have less foreign exchange i.e., dollar and consumption of dollars will be more.
5. On the basis of dollar earnings
Exports of Indian goods abroad, remittances of foreign exchange to India by Indians residing abroad, investments of foreign companies in India, investments of foreign investors in India's shares or elsewhere, foreign debt, Foreign tourists etc. If this balance is disturbed, then the value of the rupee keeps going up and down.
6. On the basis of interest rate
If the interest rate in the country is high then it can lead to shortage of money in the country and increase inflation.
Theinternational foreign exchange (forex) market determines how much a currency,like the Indian rupee (INR), is worth in relation to other currencies, such theUS dollar (USD) or euro (EUR). A decentralised, international market wherecurrencies are purchased and traded is known as the FX market.
Thedynamics of supply and demand, interest rates, inflation, economic indicators,geopolitical concerns, and market sentiment all have an impact on currencyexchange rates. Here are several crucial factors:
Thefundamental law of supply and demand is applicable to currency markets. Therupee's value tends to increase if demand exceeds supply in any givensituation. On the other hand, if supply exceeds demand, the value of the rupeecould fall.
InterestRates: Differences in interest rates amongnations have an impact on the value of currencies. The demand for the currencyrises as a result of higher interest rates luring overseas investors lookingfor better profits. On the other hand, lower interest rates can result in lessdemand and a possible reduction in the value of the currency.
Rates ofInflation: Inflation reduces a currency'sbuying power. Countries with lower inflation rates typically see an increase inthe value of their currencies, whilst those with higher inflation rates couldsee a decline.
EconomicIndicators: Economic indicators thataffect currency values include GDP growth, employment statistics, tradebalances, and fiscal policies. A currency is typically strengthened by strongeconomic performance whereas weak economic data or unfavourable indicatorsmight work against it.
Politicalstability, geopolitical tensions, trade agreements, and other world events canall have an impact on currency values. Currency depreciation can be caused byuncertainty or instability, whereas good events can increase a currency'sworth.
Investorsentiment and market psychology are important factors in the valuation ofcurrencies. Demand for a currency may be driven by positive or negativesentiment; negative sentiment may result in selling pressure and devaluation.
Sinceexchange rates are expressed as the value of one currency compared to another,it is crucial to remember that currency values are relative. Due to theinteraction of these variables and market participants including banks, firms,investors, and central banks, exchange rates are continually changing.
Throughmonetary policy actions like interest rate changes, open market transactions,and FX market intervention, central banks can also have an impact on currencyvalues.