REASON IN FLUCTUATION OF EXCHANGE RATE

Exchange rate means value of one currency in term of other.

For instance 1 USD = 53 INR. This is dollar rupee exchange
rates and indicates the value of Indian rupees per unit of dollar.

But this exchange rate does not stable.

Basically fluctuation is caused by demand and supply of the
currency.
The demand and supply generally affected by countrys trade and
its macroeconomic policies.

In simple words when the demand for one currency increases its
value increase and when its supply increases currency
depreciates.

Following are some of the reasons for fluctuation in exchange

rates

INTEREST RATE

When interest rate in home country is higher than other country,

more foreign investor will be attracted to invest in home country
to make capital gain. In this case demand for home countrys
currency will increase and may cause it to appreciate.

BALANCE OF TRADE

When in countrys balance of payment the export is greater than

import we call there is surplus. Normally it has seen the country
which face the surplus there currency value increase than country
which make deficit.
The other way to look at it is that when exports are more than
imports, more importers will sell foreign currency that received by
exporting which increases demand for home currency which
results in appreciation of currency.

MONEY SUPPLY AND INFLATION

At the time central bank of country will print more money, the
supply of money will increase in the market. Which results in
increase in purchasing power of customer also and which
ultimately increases inflation.
Since inflation and currency value are inversely related, with
increase in inflation currency depreciates.

ECONOMIC GROWTH

When the economic growth of a country is high FII would divert

there investment to such growing economy by selling their
investments in other countries, which increases supply of
currencies of those countries of which FIIs are selling investment
causing it to depreciate and the currency of country, in which FIIs
are diverting their investment, appreciates.

FOREIGN DEBT

With borrowing comes an obligation to repay the money along

with interest. So when a country borrows more foreign debt it
need more foreign currency to repay that loan, which makes it to
sell more home currency to buy foreign currency resulting in
depreciation of home currency.

Basically all these factors are linked to each other.

For example:
When home currency appreciates too much that affects exporters because now
when they receive their payments in foreign currency, after it conversion in
home currency they receive less amount because of increased home currency
value. At this point RBI intervenes and sells home currency to reduce its value,
now when RBI is selling home currency it increases supply of home currency
which results in inflation, now to control inflation RBI increases interest rates, as
interest rates increases it affects economic growth as it increases cost of
borrowing, so companies prefer to borrow from foreign markets as its cheaper
than home loans which results in increased foreign debt, which disturbs
balance of payment.