IMPACT OF INFLATION ON EXCHANGE RATE

Abstract

Inflation may be defined as rate of rise of prices of goods and services and devaluing of currency of a county . Financial institutions arrange to control inflations and simultaneously being vary of deflation to ensure smooth functioning of the economy. Purchasing power of currency decreases due to inflation. While inflation has its cons but a deflation could even be as dangerous or worse. During 20th century , those who make policies tried to control inflation and keep it at a rate of1.5-3% per fiscal. The central financial body of Europe - ECFI has many policies to curb deflation . As a result interest rates were in negative at few places Fearing deflation in Eurozone and further hampering of economy. Countries that have a higher growth rate usually have a higher inflation rate as compared to those with slower ones . A rate of exchange may be defined as the what is our home currency worth in relation to that of a foreign country. Rate at which currencies are exchanged has two parts , the domestic currency and foreign currency. This rate could be defined in both direct and indirect manner. In direct way a foreign currency is defined in terms of our home currency. On the other hand in indirect manner reverse happens. The study is aimed toward finding and analyzing the link between the rate and rate of exchange between 2 countries in both time frames : long and short.