EXCHANGE RATES (Syllabus: GS Paper 3 – Economy)

Context: The Indian rupee hit low exchange rate of 42 paise to 83.53 against the US dollar in early trade, impacted by a strong American currency and elevated crude oil prices.

Exchange Rates

• Definition: It represents the rate at which one country's currency can be exchanged for another country's currency.

oIt is a pivotal factor influencing trade and financial transactions between nations.

• Types of Rates: Fixed Exchange Rate, Flexible exchange rate, and managed floating exchange rate.
• Exchange Rate relation with other Index:
• Interest Rates: Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
• Trade Balance: Exchange rate fluctuations affect the trade balance by influencing the competitiveness of exports and the cost of imports.
• Differentials in Inflation:  Typically, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.

Related Terms

• Depreciation of Rupee: It refers to the decline in the value of the Rupee compared to the dollar, indicating that the Rupee has decreased in worth and strength relative to the dollar.
• Appreciation: It refers to the increase in the worth of an asset, like currency or property, as opposed to depreciation, which diminishes the value of an asset throughout its lifespan.
• Devaluation: It refers to the decrease in the value of a country's domestic currency as determined by the government within a fixed exchange rate system.