EXCHANGE RATE (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     6th December 2023        
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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.

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