Essay On Foreign Exchange Rate

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Exchange rate is “the price of a nation’s currency in terms of another currency” – Investopedia. Exchange rate can be quoted in two ways:
1. Direct Quotation: foreign currency’s price is expressed in domestic currency.
2. Indirect Quotation: domestic currency’s price is expressed in foreign currency.
Exchange is also referred to as currency quotation, Foreign exchange rate or forex rate. There are two types of exchange rate regimes that nations follow:
1. Fixed Exchange Rate Regime: Under this regime, the exchange rate is pegged to the value another single currency, or a basket of currencies or to the value of gold.
2. Floating Exchange Rate Regime: Under this regime, the exchange rate is allowed to freely fluctuate with respect to market forces.
A floating exchange rate is helpful for developing countries as it increases foreign exchange volatility which is an important factor for them as most of their liabilities rest in terms of foreign currencies. Also, floating rates, unlike fixed rates,
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It also is responsible for managing the Foreign Exchange Regulation Act (FEMA, 2004) by “promoting the orderly development and maintenance of foreign exchange markets in India.” RBI monitors closely monitors controls on foreign capital movements and degree of exchange market interventions along with considering the effect of internal interest rates on exchange rates. The determination of various policies in the Exchange Rate Policy are influenced strongly by the interdependence between the monetary policy, capital controls and forex market interventions. Another reason why exchange rate comes under the purview of RBI’s policymaking is because the exchange rate can potentially impact the inflation levels in the economy, economic growth and financial stability of the

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