Understanding the Impact of Inflation on Currency Exchange Rate

Impact of Inflation on Currency Exchange Rate

Inflation is the rise in the prices of goods and services over a long period. Due to the increase in the costs, the consumer’s buying power decreases. This negatively impacts the value of the currency. An international student planning to study abroad must know its pros and cons. This is important to understand as the amount of education loan you plan to take or international money transfers you make will have a huge impact due to inflation. 

In this blog, let’s understand the impact of inflation on currency exchange rates. 

What is the Impact of Inflation on Currency Exchange Rates?

When the prices of goods and services rise substantially over a long period of time, the situation is termed inflation. This is likely to negatively impact the currency exchange rates and the rates of foreign exchange. 

High inflation leads to a decrease in currency’s buying power and the value of the currency depreciates. This simply means that if an individual was initially able to purchase 5 quantities of a product (as income remains constant), he will now be able to purchase 3 quantities. As a result, the currency of a country weakens and the exchange rates are affected. 

  • The currency exchange rates are determined by the market demand and supply. 
  • When inflation is high, an individual’s demand/ purchasing power decreases. 
  • As a result, the country’s currency weakens, therefore weakening the exchange rate. 
  • The currency conversion rates go downwards and to buy one unit of a currency, an individual will have to pay more. Eg- If USD 1 equalled INR 82 before inflation, after inflation 1 USD can reach INR 90.

Also Read: Facing difficulties in managing your education loan repayment? Check this blog and understand all about Education Loan Restructure!

Impact of Inflation on Currency Exchange Rates & Education Loans

To control inflation, RBI increases the repo rate. It is the rate at which central banks lend money to commercial banks. Consequently, banks also lend loans to borrowers at higher interest rates. Thus, international students who plan to study abroad and avail of education loans are also affected as a result of inflation.

Let us consider an example to understand the impact of inflation on international students. Ramesh, an aspiring study abroad student, planned to take an education loan of INR 50 lakhs from ABC Bank. 

  • As high inflation hits the country, he will have to obtain loans at higher interest rates. 
  • Since the value of the currency depreciates, he will have to pay more Indian currency to buy one unit of foreign currency. 
  • To overcome his tuition fees, accommodation expenses and others, he will have to take a higher loan amount at higher interest rates. 

Impact of Inflation on Forex Rates & Transactions 

An individual studying abroad might experience a situation of exhausting funds. In such a scenario, parents make international money transfers to their wards in foreign countries. Such transactions are referred to as outward remittances

This will result in costlier foreign transactions which means if you routinely transfer money to your home country, more amount of Indian currency will have to be spent on purchasing one unit of the foreign currency. 

If 1 USD = INR 82 before inflation and INR 90 after inflation, the amount of outward remittance will make an impact. This means, initially you had to spend INR 24,600 to send USD 300, but now INR 27,000 will have to be spent to send the same amount USD, making it costlier for you to make foreign transactions. 

Also Read: Interest Rate increased on existing education loan? Check this blog and learn all about Education Loan Refinancing!

FAQs

How does inflation affect currency exchange rates?

When a country experiences inflation, the purchasing power of an individual is reduced and it subsequently results in depreciation of the currency’s value.

What can international students do to mitigate currency exchange rate risks?

There are options to lock in exchange rates, diversify funds across different currencies, and consider denominating expenses in a stable currency are some of the strategies to mitigate currency exchange rate risks.

What is the impact of inflation on the education loans?

As inflation increases, banks lend education loans at higher interest rates. Thus, international students who plan to study abroad and avail of education loans are also affected. They will have to take higher education loan than the desired amount to overcome expenses.  

What is the impact of inflation on the exchange rate in India?

With the rising inflation, the currency generally loses its value. It also impacts the demand for foreign exchange. 

What is the impact of inflation on foreign transactions?

International money transactions become costlier as more amount of Indian currency will have to be spent on purchasing one unit of foreign currency. 

In a nutshell, when inflation is high, the value of a country’s currency weakens and this is the time when goods become more expensive. While planning for overseas education, it is necessary to understand the impact of inflation on currency exchange rates for proper financial planning and management.

To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.

Additional Reads
Impact on Credit Score Due to Loan Restructure 
FAQs on Restructuring 2.0 Scheme of RBI
Airport Currency Exchange Rate
Income Tax Rebate on Education Loan
HDFC Bank Remittance Services

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About Shubhika Garg

Hey there! I'm Shubhika- a proud graduate in English Literature and Language from Delhi University. My journey as a content writer transitioned from online teacher into the world of words. Stepping into the domain of blogs and articles, I discovered my passion for writing growing deeper and stronger. Having said that, I have experience of writing for diverse industries in automobile, technology, ed-tech, finance and mental-health; crafting details to help you find the solution to what you are looking for. Join me as I invite you all explore and learn together.

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