Exchange Rate

An Exchange Rate shows how much of one currency is needed to buy another currency.

For example, if the exchange rate is:

₹84 per US dollar

then US$1 = ₹84.

If someone wants to exchange US$1,000 into Indian rupees at this rate, the approximate value would be:

US$1,000 × ₹84 = ₹84,000

Exchange rates can change because currencies are traded continuously in the foreign exchange market.

Important factors affecting exchange rates include:

• Interest rates
• Inflation
• Economic growth
• International trade
• Foreign investment flows
• Political and economic stability
• Central bank actions
• Demand and supply for currencies

When a currency becomes more valuable relative to another currency, it is said to appreciate.

For example, if the rupee moves from ₹84 per US dollar to ₹80 per US dollar, fewer rupees are needed to buy one dollar, meaning the rupee has appreciated against the dollar.

If the rate moves from ₹84 to ₹88 per dollar, more rupees are required to buy one dollar, meaning the rupee has depreciated.

Exchange-rate movements can affect:

• Import prices
• Export competitiveness
• Foreign travel costs
• Overseas education expenses
• International investments
• Inflation
• Company profits

Exchange Rates may be determined largely by market forces or managed to varying degrees by a country’s central bank or government.

A Weaker Rupee Raises Import Costs

An Indian company imports machinery costing US$100,000.

When the exchange rate is ₹82 per US dollar, the machinery costs:

US$100,000 × ₹82 = ₹82 lakh

Later, the rupee depreciates to ₹86 per US dollar.

The same machinery would then cost:

US$100,000 × ₹86 = ₹86 lakh

The company must now pay ₹4 lakh more even though the dollar price of the machinery has not changed.

This shows how exchange-rate movements can directly affect the cost of imports and business expenses.

1971 – Collapse of Bretton Woods Fixed Rate System
When it happened: August 1971
How it happened: US delinked dollar from gold; major currencies shifted to floating rates.

1991 – India’s Two-Step Devaluation
When it happened: July 1991
How it happened: INR was devalued by ~20% to handle balance of payments crisis.

2016 – Introduction of RBI’s New Forex Framework
When it happened: Post-2016
How it happened: RBI shifted to a market-driven approach with limited intervention to reduce volatility.