In the world of inflation, it is witnessed that the prices of commodities have been rising for decades without showing any positive aspects. Due to this, it has become difficult for an individual to maintain their budget per their wallet. The increase in prices and rates does not support the middle-class people due to zero increment in their annual income. In such times, their problems are not heard; on the contrary, India is converting its ‘Developing Economy’ into a ‘Developed Economy’. The economic rule defines that as the demand for goods and services increases, the price of the same tends to rise as the price of the commodities used to produce those goods and services, i.e. increasing the supply of the nation. Usually, higher interest rates tend to increase the value of a country’s currency. Higher interest rates also attract foreign investment, increasing the demand value of the home country’s currency. 

The exchange rate directly affects the country’s real economy through changes in the demand for exports and imports. A real depreciation of the domestic currency makes exports more competitive abroad and imports vice-versa domestically, increasing demand for domestically ‘Swadeshi’ produced goods. Increased interest rates and exchange reserves make it more expensive for firms and other commercials to expand and diversify. This, in turn, leads to cuts in investments and hurts the expectancy of employment and jobs. Along with increasing interest rates, businesses with company credit cards and existing loans can suffer from higher interest payments and less disposable income. 

In some cases, it is observed that the businesses end up paying off the interest rather than the loan payment. Aren’t these factors affecting the Indian economy? Besides, the Indian policymakers are somewhere contributing their ideas for the betterment of dimensional aspects. 

Let us briefly understand the positives and negatives of these changing interest and exchange rates prevailing in the country, along with its solution if needed. 

Factors Affecting The Rise In Rates

The Central Bank of India usually increases interest rates when inflation is predicted to rise above the boundary of their inflation target. Thus, higher interest rates increase the cost of borrowing from other institutions, reduce an individual’s disposable income, and therefore entangle the growth in consumer spending, helping to reduce inflationary pressures and cause an appreciation in the exchange rates. Thus, the effects of higher interest rates on the Indian economy and common investors or individuals are as follows.

Indian Economy vs Personal

Therefore, these are the reasons that affect higher interest rates; this, in turn, will reduce consumer spending and investment, leading to a fall in Aggregate Demand (AD). If we get lower AD, then the product would be: 

• The country will suffer lower economic growth even if negative growth or recession can prevail.
• Society will see higher unemployment in the areas. If output falls, firms will produce fewer goods and demand fewer workers for the production process.
• Higher rates will reduce spending on imports, and lower inflation will help improve the competitiveness of exports.

Indirect Effects Of Exchange Rates

Changing export and import prices arising from a change in the exchange rates primarily influences the demand for goods and services that are exported and imported, known as tradable goods and services. Besides, exchange rate movements also indicate the demand for non-tradable goods and services. An exchange rate fall is known as depreciation in the exchange rate or devaluation in a fixed exchange rate system. A weak domestic currency can push up the inflation rate in a nation along with big importers because of increased prices for foreign products. This may encourage the central bank (RBI) to raise the interest rates to counter inflation in the country, support the currency, and prevent it from driving sharply. Eventually, a strong currency desolates inflation and exerts a drag on the economy, equivalent to tight monetary policy. In response, any nation’s central bank may decide to keep interest rates normal or reduce them further to prevent the domestic currency from getting strong. Therefore, the exchange rate indirectly impacts the interest rate that is paid on the mortgage or car loan or the interest that is received on the money in the savings or money market account.

Factors Affecting Currency Exchange Rates

Aspects that influence currency exchange rates are important for various reasons, as per recent research. For countries, these factors can observe how a particular country trades with another one. For individuals, these factors affect the amount of money one can get while exchanging one currency for another. Although it is uneasy to understand, track, or even predict these factors, it is known to investors, especially if someone is interested in foreign currency. It is worth noting these factors affect currency exchange rates at a macroeconomic level, i.e. they affect global currency exchange rates and not local exchange rates. These are as follows.

• Inflation
• Interest Rates
• Public Debt
• Political Stability
• Economic Health
• Balance of Trade
• Current Account Deficit
• Speculation
• Government Intervention

The exchange rate plays a crucial role in every country’s economic and foreign activity in the current global economic world. Here, exchange rate policy is identified as one of the endogenous factors that can either positively or negatively affect a nation’s economic performance and profitability. These exchange rates play a key role in international economic transactions markets because no nation can stabilise in isolation due to varying factors subsidising. The Indian studies and economists recommend the need to be technologically inclined in all sectors of the economy. They also suggested the Indian economy being prepared in case of excess and over budgetary inflation, and implementation should be cut to the barest minimum level to void the ideal of external borrowing or outsourcing, which most expected results in external debt and services. The Indian government should direct the path of redirecting its investment profile by channelling it towards the government’s capital projects for the betterment of the countrymen. Let us appreciate and support their decision and contribute to making India a developed economic nation.