Macroeconomic

Factors Impacting
Exchange Rate
Introduction

 Macroeconomic factors are the factors which affect the wider economy.
 Unemployment
 Inflation
 Interest Rates
 GDP
 Balance of Payment

 The pursuit of economic and structural reforms has led to the integration of economies
in the world.
 The market participants have expanded from tourists, traders and businessmen to
investors and speculators who take advantage of profitability arising from the
fluctuations in the exchange rates.

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 India’s Foreign exchange have been the record highest in the year
2018 is 393k million dollars.

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Literature Review

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“ Foreign exchange market is an over the counter market, regulated
by Reserve bank of India through the exchange control
department of a country. The Indian foreign exchange market is
made up of buyers, sellers, market intermediaries and the
monetary authority of India.

It involves transactions of strong, stable and convertible

currencies namely US dollar, UK Pound-sterling, Euro and
Japanese yen.

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Foreign Exchange Market - Operations

 Foreign Exchange Market Functions:-

 Transfer of purchasing power from one country to another and from one currency to
another.
 Provision of credit and hedging facilities to cover the foreign trade risks and
exchange rate fluctuation.

 Types of Foreign Exchange System

Exchange Rate
System

Fixed Floating
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Equilibrium in Foreign Exchange Market (Relation with
US Dollars)

 Increase in demand for US dollars, supply remaining the

same, will cause the demand curve DD shift to D’D’. The
resulting intersection will be at a higher exchange rate, i.e.,
exchange rate will rise from OR to OR1. It shows
depreciation of Indian currency (rupees)
 Likewise, an increase in supply of US dollar will cause
supply curve SS shift to S’S’ and as a result exchange rate
will fall from OR to OR2. It indicates appreciation of Indian
currency.

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Determinants of Exchange Rate

 Differential interest rate

 An interest rate differential is a difference in interest
rate between two countries in a pair.
 Foreign investors will borrow from country with low
interest late and invest money in a country with high
interest rates.
Increased
Increase In Increase In Spending –
More Foreign Appreciation
Interest Money Increased
Investments of currency
Rates Supply demand for
rupee

 Central Banks also use interest rates as a tool to

control inflation. Controlled inflation implies stable
currency value. Currently, the bank rate in India stands
at 6.5% and US Bank rate is 5.25%. 8
Determinants of Exchange Rate

 Gold Prices
 Gold is used as a hedge against the adverse exchange value of
dollar.
 Under the fixed rate system exchange rates are decided against the
value of gold per ounce or dollar or pound, and the demand and
supply of currency are controlled by the central government.
Therefore, higher the value of gold higher the exchange rate.
 A country that imports large quantities of gold will have large impact
on the value of its currency.

Increased
More Greater Depreciation
Increase In demand for
expensive outflow of of domestic
Gold prices foreign
imports money currency
currency
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Determinants of Exchange Rate

 Differential In Inflation
▰ An inflation differential is a difference in inflation rates between two
countries in a pair.
▰ A country with lower inflation rate exhibits a rising currency value, as
its purchasing power increases relative to other currencies.
▰ Those countries with higher inflation typically see depreciation in their
currency in relation to the currencies of their trading partners.
▰ Traders will buy from country with low inflation (low prices) and sell in
a country with high inflation (high prices).
Low demand Depreciation
Rise In Low demand/
High Prices for domestic of domestic
inflation spending
currency currency

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Determinants of Exchange Rate

 Crude Oil Prices

 Crude oil is a basic commodity that needs to be imported for our very
daily needs.
 As the crude oil prices rise, a country like India with high crude oil imports
is impacted the most. As rupee gets weaker, imported goods will be more
costly. So, there will be inflation for the import sector.
 Increase in crude oil price, will also increase cost of production and
transportation which will lead to decrease in purchasing power of the
country.

Increased
More Greater Depreciation
Increase In demand for
expensive outflow of of domestic
crude prices foreign
imports money currency
currency
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Determinants of Exchange Rate

 GDP
 GDP is the final value of goods and services produced within the
geographic boundaries of a country during a specified period of
time, normally a year.
 Countries with strong GDP will be able to attract foreign
investments which in turn will improve the valuation of the home
currency.
 Also, as GDP rises value of exports will also improve, thereby
increasing the demand for domestic currency and increasing its
value.
Increased
Increased Greater Appreciation
demand for
High GDP foreign inflow of of domestic
domestic
investment money currency
currency
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Determinants of Exchange Rate

 Net Foreign Investments

 There are two types-Foreign direct investment and Portfolio
investment.
 Higher foreign investment inflows mean increased money supply
and spending power in the country.
 Currently, the FDI in India is 1898k Million dollars and
 India received 22 billion USD FDI, in the first half of 2018 and made
it to the top 10 host economies receiving the most FDI during the
period.
Increased
Greater Appreciation
High foreign demand for
inflow of of domestic
investments domestic
money currency
currency
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Determinants of Exchange Rate

 Balance of Trade
 Balance of Trade is the difference between a countries imports and
exports. Trade deficit is the excess of imports over exports.
 Lower the trade deficit better it is.
 Higher exports will lead to higher demand for domestic currency
and will also increase the foreign inflows in the country.
 India trade deficit widened to USD 17.13 billion in October of 2018.

Increased
Appreciation
Low trade demand for
High exports of domestic
deficit domestic
currency
currency

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2
Data Collection and
Research Methodology

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3
Findings

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4
Interpretation

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5
Current Scenerio

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Conclusion

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THANKS!
Any questions?

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