Exchange Rate refers to the value of one countryís currency expressed in terms of another. It determines how much of one currency you can exchange for another, playing a crucial role in international trade, investments, and global financial markets. For example, if the USD/INR exchange rate is 84.00, it means one US dollar equals 84 Indian rupees.

Types of Exchange Rates:

• Fixed Exchange Rate: The currencyís value is pegged or maintained at a predetermined level by the government or central bank, such as the Indian rupeeís partial peg during earlier decades.
• Floating Exchange Rate: Determined by market forces of demand and supply in the foreign exchange market. Most modern economies, including India, follow this system.
• Managed Floating Rate: A hybrid system where the central bank occasionally intervenes to stabilize currency fluctuations.

Factors Influencing Exchange Rates:

• Inflation Rates: Countries with lower inflation tend to see their currency appreciate over time.
• Interest Rates: Higher interest rates attract foreign capital, strengthening the currency.
• Trade Balance: A surplus increases demand for a countryís currency, while a deficit can weaken it.
• Political Stability: Economically and politically stable nations tend to have stronger, more reliable currencies.

Example:
If an Indian importer buys goods worth $10,000 when the USD/INR rate is 84, the cost equals ?8,40,000. If the rupee weakens to 86, the cost rises to ?8,60,000, showing how exchange rate fluctuations impact trade expenses.

Significance of Exchange Rates:
Exchange rates affect the prices of imported and exported goods, foreign investments, and tourism. For investors, currency movements can impact returns from international portfolios or foreign equity holdings.

In summary, the exchange rate is a vital indicator of a nationís economic health and competitiveness. Understanding it helps businesses, investors, and policymakers manage global financial risks and make informed economic decisions.