A falling rupee can be both good news and bad news. For non-resident Indians and Indian exporters, a falling rupee means higher earnings when they convert foreign income or export revenues into INR.
However, for foreign travellers and students staying in the US, this can be a cause of concern as their expenses in USD become more costly.
Fluctuations in exchange rates significantly impact the amount of remittance you receive. In this blog, we will learn how exchange rates affect the remittance rate, what factors influence exchange rates, and how you can get the best remittance rate while exchanging dollars for the Indian rupee.
What is an Exchange Rate?
The exchange rate is the rate at which one currency is exchanged for another currency.
The exchange rate is an important financial determinant that determines how much of the Indian rupee you will get in exchange for a unit of the US dollar.
The exchange rate can be either fixed or floating:
- Fixed exchange rate: Fixed exchange rates provide stability by minimising fluctuations, which can be beneficial for businesses involved in international trade, as it reduces the risk of unpredictable changes in currency value.
- Floating Exchange Rates: Floating exchange rates can adjust automatically to economic changes, helping to correct trade imbalances and respond to shifts in global financial conditions, which can lead to a more balanced and resilient economy.
What are the Factors Influencing Exchange Rates?
Different factors influencing exchange rates between two countries are:
1. Economic Activity
Economic activity measures production and consumption of goods and services in the country. It shows the overall health of an economy where higher activity means a stronger economy and vice versa. A developing economy usually strengthens the currency.
Economic indicators like manufacturing output, retail sales, and trade balances between the countries also provide the economic health of the country.
2. Interest Rates
Interest rates, set by a country's central bank, influence borrowing costs and investment returns.
Higher interest rates provide a better return on investment and thus attract foreign capital. The Central Bank adjusts interest rates to control inflation and stabilise the economy's impact on the currency value.
3. Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the total value of all goods and services produced within a country over a specific period. A higher GDP means a robust economy which again strengthens the currency of the country. GDP growth attracts more foreign investors looking for profitable investment opportunities.
4. Unemployment Rate
The unemployment rate measures the percentage of the labour force that is unemployed and actively seeking work. A lower unemployment rate shows a healthy economy and boosts the currency value. A high employment level attracts more foreign investment due to economic stability.
5. Market Speculation
Market speculation involves traders and investors making predictions about future market movements. Investors' perceptions and predictions for future markets can cause short-term fluctuations. Speculative activities in the forex market may lead to fluctuations or rapid changes in exchange rates.
6. Inflation Rate
The inflation rate measures the rate at which the general price level of goods and services is rising. The lower inflation rate is tied to an increase in purchasing power and thus it boosts the currency. High inflation erodes the value of the currency and attracts fewer investors to the country.
7. Trade Balances
The trade balance is the difference between a country’s exports and imports. A trade surplus where exports are more than imports shows strong currency value due to higher foreign demand. A trade deficit where imports are more than exports shows weaker currency.
How to Get the Best Remittance Exchange Rate?
The below-mentioned tips can help you get the best remittance exchange rate:
- Regular Checking: Exchange rates can fluctuate based on market conditions, economic events, and political stability. Monitor exchange rate trends to identify when rates are favourable.
- Rate Alerts: Use apps and online tools that provide real-time exchange rate alerts to notify you when rates are high.
- Service Fees: Different services offer different rates and fees. Compare several providers to find the best combination.
- Hidden Costs: Be aware of any hidden fees or charges that might reduce the amount received.
- Avoid Peak Times: Some periods, like holidays or financial crises, can cause unfavourable rates. Plan your transfers accordingly.
- Lock-in Rates: Some remittance services offer forward contracts, allowing you to lock in a favourable exchange rate for future transfers.
- Lower Fees: Online remittance services often offer lower fees and better exchange rates compared to traditional banks.
- Convenience: They provide the ability to transfer money from anywhere at any time to make the most of the best exchange rates.
- Discounts: Some remittance services offer loyalty programs that offer discounts or better rates for frequent usees. Look for promotional offers or discounts that can reduce fees.
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Conclusion
Exchange rates can impact the values of remittances sent from the US to India. It is important to understand the factors that influence these rates, such as economic activity, interest rate, GDP, and inflation.
It is also important to monitor the exchange rate, compare remittance services, and choose the right timing to send the maximum amount from the US to India.
FAQs
Q1. Why do exchange rates fluctuate?
Exchange rates fluctuate due to factors like economic activity, interest rates, political stability, and market speculation. The scenarios cause changes in the supply and demand for different currencies.
Q2. How often do exchange rates change?
Exchange rates change on a daily and hourly basis depending on the market condition and economic data.
Q3. Do all remittance services offer the same exchange rate?
No, different remittance services offer different exchange rates and fees. Therefore it is important to compare rates from different providers to get the best rates.
Q4. Can you lock in an exchange rate for future transfers?
Yes, some remittance services offer forward contracts that allow you to lock in a favourable exchange rate for a future date and protect against rate fluctuations.
Q5. How can the exchange rate margin impact your remittance?
The exchange rate margin is the difference between the buy and sell rates. It can reduce the amount received. Therefore, a smaller margin means better rates and more money for the receiver.
Aayush is a strategic growth marketer with over 6 years of experience working in the US and European markets for various financial services companies. He has a proven track record of success in helping businesses grow, increase revenue, and improve marketing strategies.
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