Determination_of_Exchange_Rate_Presentation.pptx

Determination_of_Exchange_Rate

1. Determination of Exchange Rate Understanding how currency values are set in the global economy

2. Introduction • The exchange rate is the price of one currency in terms of another. • It plays a key role in international trade and finance. • Exchange rate determination helps in understanding currency fluctuations.

3. Types of Exchange Rate 1. Fixed Exchange Rate – controlled by the government or central bank. 2. Floating Exchange Rate – determined by market forces of demand and supply. 3. Managed Floating – partly controlled and partly market-determined.

4. Demand and Supply of Foreign Exchange • Demand for foreign currency arises for imports, travel, investment, etc. • Supply arises from exports, foreign investments, and remittances. • The equilibrium exchange rate is determined where demand equals supply.

5. Factors Affecting Exchange Rate • Inflation rate • Interest rate • Balance of payments • Political stability • Speculation and expectations

6. Purchasing Power Parity (PPP) Theory • States that exchange rates adjust to equalize the purchasing power of different currencies. • Example: If inflation is higher in one country, its currency will depreciate.

7. Interest Rate Parity Theory • Suggests that the difference in interest rates between two countries equals the expected change in exchange rates. • Investors move funds to countries with higher returns, affecting currency value.

8. Balance of Payments Theory • States that exchange rate is determined by the demand and supply of foreign exchange due to trade and capital flows. • Surplus in balance of payments leads to currency appreciation; deficit causes depreciation.

9. Government Intervention • Central banks may buy or sell foreign currencies to stabilize the exchange rate. • They use monetary policy and reserves to influence currency value. • Example: RBI intervention in the forex market.

10. Conclusion • Exchange rate determination is influenced by market forces, policies, and global factors. • Understanding these helps in trade, investment, and economic planning.