InvestorQ : Why exchange rates depreciate by lowering interest rates ?
kapil sharma made post

Why exchange rates depreciate by lowering interest rates ?

Answer
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7 months ago


I think you are referring to the current rate like rupee / dollar. You are right that when the interest rates are lowered in India then the rupee weakens against the dollar. Here is why that happens. Normally countries with higher levels of inflation have a higher rate of interest. That is essential because global bond investors prefer to invest in countries that offer a higher real rate of interest rates. When rates fall then the real yield on the bonds start falling and that reduces the attractiveness for foreign investors. That is when you get to see lot of funds flowing out as FPIs withdraw funds from India. This rush out of money leads to a weak rupee.