Domestic Currency tends to depreciate owing to :
High inflation rate
Relative purchasing power parity says the exchange rate moves to offset differences in inflation between two countries: \( \frac{S_1}{S_0} = \frac{1 + \pi_d}{1 + \pi_f} \), where \( S \) is the price of foreign currency in domestic currency and \( \pi_d \), \( \pi_f \) are domestic and foreign inflation.
When domestic inflation is high, home goods become dearer, exports fall and imports rise. Demand for the domestic currency falls while demand for foreign currency rises, so \( S \) rises, which means the domestic currency depreciates.
A lower inflation rate works the other way, making exports competitive and tending to strengthen the currency. A constant inflation rate, by itself, gives no reason for depreciation if it is in line with trading partners.
Since lower inflation pushes the currency up, the three causes cannot all hold together.
Hence, High inflation rate.
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