2. What are the factors on which the Indian exchange rate is affected? What are the various types of foreign market operations?
The Indian Rupee's exchange rate changes based on market supply and demand. Key drivers include interest rates, inflation, and trade balances. The Reserve Bank of India (RBI) manages this. It buys or sells currencies in different market types to keep the Rupee stable. [1, 2, 3]
Factors Affecting the Indian Exchange Rate
- Interest Rates: When Indian interest rates are high, global investors chase higher returns. This increases demand for the Rupee, strengthening it.
- Inflation: High inflation lowers the value of money. If India's inflation is higher than in the US, the Rupee tends to weaken.
- Trade Deficit: India buys more foreign goods (like oil) than it sells. This requires buying more foreign currency, which weakens the Rupee.
- Capital Flows: Foreign money flowing into Indian stocks or businesses boosts the Rupee. Money flowing out makes it drop. [1]
Types of Foreign Market Operations
- Spot Market: Currencies are bought and sold at current prices for immediate delivery. The transaction clears in just two days.
- Forward Market: Businesses agree today to buy or sell currency at a fixed price on a future date. This locks in costs and protects against currency drops.
- Futures Market: Similar to forward markets, but these contracts are standardized and traded on public exchanges.
- Swap Market: A simultaneous buying and selling of two currencies for different value dates. For example, the RBI trades Rupees for US dollars today, and agrees to reverse the trade later. [7, 8]
To track the current value of the Rupee and RBI guidelines, check the official Reserve Bank of India portal.
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