Factors causing Currency Appreciation or Depreciation

Some factors affecting Currency Appreciation or Depreciation are as follows: Current Account Deficit It is when a countrys imports exceed its exports. When a Country imports more, it needs to pay in foreign currency, causing the countrys currency to depreciate as the demand for foreign currency increases. Capital Account Flows: CAD is funded by capital inflows. When there is capital inflow in India demand for Rupee increases which will lead to currency appreciation. In case of Capital outflows i.e. in the form of foreign investments demand for foreign currency increases which will result in depreciation of Rupee. Interest Rate: A Country with high interest rates attracts more foreign investors. Thus demand for rupee increases, resulting in appreciation of its value. However this arbitrage benefit sought by the investors is dependent on stability of the currency. Else return will get offset by currency depreciation. Inflation: High inflation impacts the countrys exports as goods become expensive for other countries resulting in decreased demand for rupee leading to depreciated rupee value. Monetary Policy: If the Central Bank eases the monetary policy, the supply of currency will increase which will result in depreciation of its value.