INFLUENCE OF FLUCTUATION IN EXCHAGE RATE ON INDIAN ECONOMY

Exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries. Interest rates, Inflation and exchange rates are highly related. Reserve bank changes the interest rates to control the Inflation and exchange rates. When our economy is doing well and market is performing better than other countries, overseas investors would invest heavily on our market. How they would put it in our market? They will sell or convert to our currency and invest in India. It is clear that when more investors coming to India, the demand for the currency will be very high. Our rupee value will be increased against dollar. In the same way, when they are pulling out of market, demand for the rupee will be decreased and value is depreciated. Dollar, it is the global currency and most of the countries trading using the dollar as trade reserve currency. When we are importing from other countries, we should have the currency of that country to pay for the trade. The value for the currency is fluctuated on real time. If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly on financial markets, mainly by banks, around the world.

Indian foreign exchange rate system: - India foreign exchange rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed foreign exchange rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating foreign exchange rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar. Indian rupee appreciation against dollar impacted heavily to the following: 1. Exporters 2. Importers 3. Foreign investors Impact of INR vs. USD The Indian rupee has depreciated against the US dollar value. It is expected that it would continue the slide as many macro economic factors not in favor of Indian economy. The following are the factors which would slide down the rupee value. Foreign Funds Outflow: - It is the major concern of Indian economy now. Because of the global uncertainty and various economy crisis like Europe sovereign debt problem, US economy problem, etc leads to search for the safe heaven among the investors. They are quickly pulling out the money fro Indian market and investing in any other safe investments like Gold or US dollar.

Government Deficit is High: - The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10 per cent of GDP. It is high deficit and investors lost faith in the local economy. Political Uncertainty and Corruption:-This is one of the major factors for any country to stabilize the economy. In India, last one year we are seeing the series of corruptions and there is no good news from the ruling party (Congress) about the economic reforms and lot of agitation among the citizens including the veteran Gandhian Anna Hazares campaign of Fight for Second Freedom which took attention from global media. India needs political change to gain confidence among the investors.