What factors cause the Indian money exchange rate to fluctuate?


Quick Answer

Perceptions of the political strength of the party in power and the country's export and import policies influence India's exchange rate, according to Bloomberg. Large inflows of foreign institutional investment and the state of the country's balance of payments also affect the rate.

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Full Answer

Perceptions of a country's political and economic risk have considerable bearing on its exchange rate, explains Investopedia. Countries with favorable political and economic climes draw investors away from locales that are less attractive, which boosts the value of their currencies.

The state of the current account, which is the balance of trade between a country and its trading partners, also influences exchange rates, notes Investopedia. Countries with negative current accounts spend more on trade than they gain, which weighs down the value of their currencies.

The terms of trade, which represent the ratio of export prices to import prices, also impinge on exchange rates, explains Investopedia. When the terms of trade are favorable, the value of exports rises faster than that of imports. This leads to increased revenue and signals a rising thirst for the goods of the country in question, which in turn causes greater demand for its currency, leading to a favorable exchange rate. However, if the value of a country's imports rises faster than that of its exports, the worth of its currency dips.

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