Why Do Currency Exchange Rates Fluctuate?

Before understanding the reasons behind fluctuation of currency, you need to understand what an exchange rate and Forex trading is. An exchange rate is a rate of a currency against other country. It depends upon various factors; the major factor is competitive trade and economy advantages. Just like any other commodity its value is dependant upon demand and supply. Higher the demand of the currency, the higher the value it becomes. Currencies like an Indian rupee which is not specifically traded on exchanges; its value is dependant upon the capital inflows.

What is appreciation and depreciation of currency?

Appreciation of currency signifies that Indian rupee is appreciating in relation with dollar for example earlier 1$= Rs 45, but now 1$= Rs 54, it means the value of rupee has depreciation against dollar. Similarly, if 1$= Rs 50, it means the rupee is appreciating against dollar.

Why rupee is fluctuating against dollar?

• The major reason why Indian Rupee is fluctuating against dollar is unstable political scenario, is the major cause. The ruling party is responsible for so many scams like coal scam, 2G scam, commonwealth games scam, telgi scam, IPL scam, to name a few.
• The other major factor is policy paralysis- The govt is not been able to make staunch policies regarding FDI or other important things.
• What acts as a classic lead indicator of depreciation of currency is lack of coalition support. Be it any decision whether it is railway budget or removing rail minister or current presidential election, coalition govt is there to oppose policies of govt.
• Other major factor is India is also sliding into a new recession. Although optimists believe that only, rich countries are undergoing double dip recession. We have strength and resilience that is actually stemming the rot.
• Global situations - We are not protected by global economic situations like euro crisis, it has inflicted a sense of displeasure among all the leading economies, especially U.S.
• We can sum up in this way when there are large sellers of the currency the exchange rate dip, so the same is happening to Indian currency. It simply does not mean that people are not interested in money, but it simply means people don’t want to keep wealth in form of currency rather they want to hoard money in some other form.
• The other major reason downfall of rupee is lower credit rating by standard rating agencies like Standard and Poor and Fitch. It has lowered the economic outlook, thus creating fear in minds of investors.
• Majority of the dealers are of opinion that RBI action or intervention is missing in the forex market even as rupee continues to free fall in a day.
• The other reason is crude falling to nearly an 18 month low of $90 a barrel.
• The treasury managers are saying that rupee can even breach a level of 58 per dollar by next week.

Is Govt doing something?

Many people are apprehensive about the Govt itself, but govt is adopting following measures to enrich the economy.

Govt is trying to gain 51% FDI support from non UPA states. This decision was held up by UPA rally, in the wake strong opposition by coalition and other parties. Commerce minister has written to various CM’s of Punjab, Odhisa, Utta Pradesh, asking them to understand intrinsic merit of the proposal.

Ikea to pump money- Swedish Furniture Company is planning to invest in India with Rs 10,500 crore in a single brand retail venture. The commerce ministry said that company has sought the permissions to set up a 100% Indian venture.

About Author : This is a guest post written by Mircea Giurca who does research on money converter calculator. He suggests his readers to visit his website to calculate and convert currencies.