Money Exchange Rates – What is Money Exchange Rate, its Types and Factors that Affect the Exchange Rate

An exchange rate is a rate at which a currency of certain country will be exchanged for other currency in foreign exchange market. The currency exchange rates are subjected to various factors, but predominantly on the demand and supply of currency at time of exchange.

Information about the exchange rate is crucial when doing business or sending remittances from the US to India. For example, knowing the value of the exchange rate between a USD and an INR can be beneficial before sending money to your loved in India from the US.

Today, there are many remittance services for conversion and transfer of money from USA to India. Money2India service from ICICI Bank offers competitive exchange rate and zero transfer fees for transaction above USD 1,000for money transfers from USA to India. This helps you get valuable savings on each remittance transaction and the receivers in India get a maximum amount.

Now that we understand what a money exchange rate is, let’s focus on its types and the factors associated with the changes in exchange rates.

Difference between Fixed Exchange rates and Floating exchange rates:

Fixed Exchange Rate System:

In Fixed exchange rates system, the rates are pegged against dominant currencies in the world like USD. The rates are usually fixed by the respective country’s government and do not rely on external market factors. This is done so that foreign exchange is stable. Countries like Qatar and Saudi Arabia have fixed exchange rate system.

Since the value of a currency is fixed and shielded by fluctuations, this creates a dependency on government on having enough foreign reserves to keep the economy stable.

Floating Exchange Rate System:

This system is also known as the flexible exchange rate, as it depends on supply, demand, and other factors. The government is not involved in deciding this exchange rate system. Hence, it is volatile in nature. The volatile nature of such a system can sometimes generate speculations. Countries like India, Australia, UK have floating exchange rate system.

Factors That Affect the Exchange Rate

Inflation/Deflation:

Inflation/Deflationindirectly affects changes in exchange rates. Higher inflation or Deflation may invite government intervention in controlling the floating currency in the market which can result in the appreciation or depreciation of a currency.

Interest Rates:

The interest rate affects the exchange rates as higher interest rates attract foreign investments in the country which usually comes in U.S. Dollars. This increased supply of dollars will affect the USD-INR value in foreign exchange market. The difference between Interest rate of two countries often affect the exchange rate of their currenciessoa higher interest rate if translate to foreign investments support the rise in the exchange rate.

Recession:

If a country faces a recession, the government usually reduces interest rates to boost the economy. This also reduces foreign investments which usually in dollars. Government may also consider quantitative easing to increase the floating money in the market. These factors contribute to imbalance the USD to INR currencies in market thus depreciating exchange rates.

All of these factors contribute to changes in the exchange rates worldwide. Overall, these factors are complex and subject to market changes. Whether you plan on investing or making remittances, you need to be aware of these factors, which will help you make an informed decision.