EXCHANGE RATES (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     5th June 2024        

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 InflationTypically, 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.
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