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For the below let's assume domestic currency is ₹ and foreign capital is in \$

Foreign Capital Inflow => ₹ Appreciates (Because of more \$)

But consider this,

Foreign Capital Inflow => More ₹ in circulation (Since \$ have to be exchanged into ₹ before actually using in India) => More Inflation => ₹  Depreciation

What is wrong in this second reasoning?

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  • $\begingroup$ This is one of the economic myth circulate around the world by various media and public perception. Currency inflation is always tied with supply and demand of the local note, not the foreign factor. $\endgroup$
    – mootmoot
    Commented Apr 23, 2018 at 12:49

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I think the flaw in your reasoning is expecting that foreign capital inflow would lead to more ₹ in circulation. When investors bring in capital, they are buying ₹ that were previously in circulation. This additional demand without additional supply is exactly what drives the price of the ₹ up. There is no increase in the quantity of ₹ circulating unless the government/central bank responds in some way.

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Bro, more inflation is a domestic phenomenon,when u said more inflation means indian currency has relatively declined in its value in domestic market,lesser no. Of domestic goods can be purchased domestically but if exchange rate is not changing this inflation has no affect internationally Depreciation is a international phenomenon,comparing two currencies.

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    $\begingroup$ (-1) for assuming OP is a "bro". $\endgroup$
    – Giskard
    Commented Jul 23, 2019 at 19:33

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