EXCHANGE RATE (Syllabus: GS Paper 3 – Economy)

Context: Recently, the Indian rupee experienced an 8 paise decline against the US dollar due to a rebound in the greenback in international markets.

Exchange Rate

• About: An exchange rate represents the value of one nation's currency in comparison to the currency of another nation or economic zone.
• Types: Free-floating and Fixed.
• Free-Floating: Free-floating exchange rates fluctuate based on the dynamics of the foreign exchange market, experiencing rises and falls in response to market changes.
• Fixed: In contrast, fixed exchange rates are tethered or pegged to the value of another specific currency.

How is the exchange rate determined?

• The market supply and demand determine floating rates. 
• A currency's value in relation to another currency is determined by how much demand there is compared to supply.

Role of Reserve Bank of India (RBI)

• Monitoring foreign currency markets and intervening when necessary.
• Relaxing restrictions on foreign ownership of government bonds and increasing borrowing limits for businesses to attract foreign currency inflows.
• Proposing rupee settlement methods to reduce the demand for US dollars in international trade.