What are the factors to be considered while investing in Indian forex market?
The forex market or foreign exchange market is a market for trading in currencies. It is a global level decentralized mechanism and through the forex market buying, selling as well as exchanging of different currencies at the determined prices is possible. When anyone does the trading in foreign currency then it is known as forex trading. Investors can take advantage of the currency fluctuations and earn profits through it. The foreign exchange market in India operates under Central Government and is regulated by RBI. Main centre for foreign exchange dealings is Mumbai and it is growing at a very rapid speed. The Indian stock exchanges like BSE, NSE, and MCX etc allow the legal forex trading amongst market participants. All individuals, banks, intermediaries, financial institutions etc. can enter into forex market trading.
There are certain Factors that the investors must know before investing in the Indian forex market and these are as follows-
1. The rate of Inflation
The currency exchange rates will change if there are changes in the market inflation rate. The country whose inflation rate has come down will enjoy appreciation in its currency value. And the country whose inflation rates are increasing then its currency value will depreciate. Thus it is an important factor while investing in the Indian forex market.
2. Consider the recession aspect in a Country
If you are considering trading in any currency then keep an account of the recession level in that country. During recession interest rates fall and acquiring foreign capital becomes a difficult task. Thus the currency value depreciates in such a situation.
3. Speculative opportunities
If investors believe that the value of a particular currency will rise in future then there will be more demand for it. With this increased demand a rise in the exchange rate is seen as well.
4. The prevailing rate of interest
Increase in interest rates will lead to appreciation in the value of currency leading to higher exchange rates and decrease in interest rates lead to depreciation in the value of currency thereby lowering the exchange rate. Thus interest rate is an important criterion to analyze before trading in any currency.
5. Current account statement of a nation
If the current account of a nation reports deficit then it will cause depreciation in its currency value. This acts like a guide while investing in foreign currency.
6. Political situation in a nation
A country with stable political scenario will notice appreciation in the value of its currency whereas the nation facing political turmoil will notice depreciation in currency’s value.
7. Economic progress
Before trading in any currency investors should know the economic progress of that nation. If it is progressing on the economic front then its currency value will appreciate.
8. Terms of trade of a nation
If a nation’s terms of trade have improved over a period of time then eventually the value of currency will also rise and it will lead to an appreciation in the exchange rate as well.
9. Government borrowings
A government under a lot of debt will see a lot of inflation. Due to inflation the value of currency will depreciate and so will be the exchange rate.
Note:All these factors are worth considering before investing in any currency in the Indian forex market. By keeping these things in mind you can trade in the currency of your choice and gain from the dealings.