EXCHANGE RATE

 EXCHANGE RATE
It is the rate at which one currency exchange for another. In other words it is the price of one currency in terms of another.
 Why do exchange rates fluctuate? / Reasons for the changes in exchange rate
 Interest rate changes:
If our country’s bank offer high interest rate, then foreigners will prefer to deposit their
money in our banks. This will increase the demand for our currency and there by the changes in
exchange rate.
 Balance of payment problems:
Balance of payment deficits will cause to an increase in demand for foreign currency and
decrease in supply of foreign currency. This will cause to the changes in exchange rate.
 Political stability:
Political stability encourages inflow of foreign capital and there by the changes in exchange rate.
 Inflation or deflation:
Inflation or deflation cause to the changes in internal value of currency, it also reflect similar changes in external value also.
 Capital flow:
Capital flow from one country to another brings changes in exchange rate.
 Protectionism:
It will leads to decrease in imports, then demand for foreign currency will decrease and there
by the changes in rate of exchange.
 Purchase and sale of foreign securities:
It will affect demand and supply of foreign exchange and there by the changes in exchange
rate.
 Exchange control:
The measures of exchange control will leads to a fall in the demand for foreign currency and
there by the changes in exchange rate.
 Bank rate:
Changes in bank rate causes fluctuations in exchange rate.
Depreciation
Depreciation means fall in the external value of a currency. It makes export cheap and
import expensive.
Appreciation
Appreciation means increase in the external value of a currency. It makes import cheap and
export expensive.