In theory other things being equal a percentage increase in

In theory, other things being equal, a percentage increase in a country’s rate of inflation should lead to a percentage decrease in the value of its currency. Under what conditions this relationship would not hold in reality.

Solution

This relationship may not hold in following circumstance:

Higher domestic inflation tend to make domestic interest rates higher. As interest rates rise, global investors invest more in the domestic economy, which leads to higher demand for domestic currency, leading to a currency appreciation. If the interest-rate effect is stronger than the inflation effect, domestic currency appreciates.