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Here are the Factors Determining Changes in Exchange Rates December 20, 2018

Here are the Factors Determining Changes in Exchange Rates

Foreign exchange aka Forex defines a group of activities associated with the conversion of currencies between countries. In other words, forex deals with the scope of procedures required to convert one country’s currency into another. While forex is a vast field dealing with a multitude of factors, the foreign exchange rate or forex rate is pretty much simple and straightforward.

From a simple outlook, forex rates are the variable standards that determine the value of a country’s currency vis-a-vis another. Studying forex rate can seem to be a tricky affair as a number of factors are responsible for increasing its complexity. These factors or determinants help drive the value of currency exchange periodically.

Exchange rates have a lot do with a nation’s relationship with other countries in the fields of trade and commerce. Remember, a country having a high-value currency enjoys relatively cheaper imports compared to a country with a low-value currency. For example, in India, the imports from countries like the USA and UK are expensive as the Indian currency holds a lower value compared to the currencies of the latter. To know more about the best foreign exchange rates in India, talk to a professional forex agency or a credible (and approved) online portal dealing with forex like the Best Price Forex.

The main determinants of the forex rate are discussed below:

On a short-term basis

  • Interest Rates – The exchange rate of a country is connected to its interest rate. The interest rates are normally controlled by the central banks such as the RBI in case of India. This arrangement helps in controlling inflation and subsequently the exchange rates of the country. By having a higher interest rate, a country can attract foreign investors along with foreign capital. This can cause the exchange rates to go up. However, the positive side of having higher interest rates can be neutralized or mitigated by high inflation along with other unfavourable conditions.
  • Deficits in current account – The current account deals with the balance of trade between two countries. It reflects all the payments that are made between two countries in return for services, goods, interest, and dividends. At times, when one country’s expenses increase in foreign trade compared to its earnings, a deficit shows up in the current account. The deficit forces a country to borrow capital from foreign sources to meet the shortfall. As a result, more foreign currency is received than what is sourced by sales and exports. This situation plays a significant role in lowering the currency value.
  • Social Debt – Countries engaging in extravagant expenditure end up having debts while financing public sector projects. Though this form of activity stimulates the domestic economy, the country attracts a less number of foreign investors. A rising public debt can lead to consequences such as high inflation. Therefore, social debt can be a threat to the value of the currency of a nation.
  • Trade – The balance of payments of a country is determined by factors such as a trade surplus or deficit. When the value of a country’s export surpasses the value of its imports, the country can be considered to have a favourable exchange rate. If the balance of payments shows an improvement, the country faces an increased demand for exports, which brings in foreign money resulting in a higher value of the currency.
  • Economic Growth: When a country clocks a robust economic performance, the investor outlook gets better especially for the long term investment climate. This upbeat sentiment can lead to the strengthening of the currency.
  • Negative Factors: The currency can see a fall in its value if the concerned country goes through upheavals – economical (recession), geopolitical (wars, internal unrest), or natural (earthquakes, floods or any natural disaster).

On a long-term basis

  • Inflation: It has been found that a country with a lower inflation rate has a high-valued currency; this is due to the fact that the country gains an increased purchasing capability. On the contrary, countries with a higher inflation rate experience decreasing value of their currencies in comparison to the other countries. An agent dealing with foreign exchange may provide information on the best currency exchange rates in Bangalore, Chandigarh, Mumbai, Chennai, Delhi, Kolkata etc.
  • Policy measures: The government or the central bank can implement policy measures to provide stimulus to the economy from time to time. For example, liberalizing the economy by India in the nineties was a major policy decision that helped the currency to stabilize and strengthen over a period of time.

Variables Affecting Forex Rates Of A Country


The above mentioned factors play a significant role in determining the exchange rate of a country. Frequent changes in exchange rates can be troublesome. People involved in offshore business or students going abroad have to deal with frequently changing currency rates. If you are willing to know more about the best foreign exchange rates in cities across India such as Bangalore, New Delhi, Noida, Gurgaon, Chandigarh, Ahmedabad, Mumbai, Kolkata, Chennai etc., then visit the approved online portal of Best Price Index.

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