Exchange rate:

• “The rate at which the currency of one country can be converted into currency of another country is called exchange rate”.
• “Exchange rate is the price of a foreign currency in terms of domestic currency”.

Example:

• Suppose, exchange rate of US $ 1 = ₹ 60. This means that in order to buy 1 US dollar, an Indian will have to pay ₹ 60. This also means that if an American comes to India, his 1 dollar will fetch him 60 rupees.
• A rise in the exchange rate for India means that the value of Indian currency has declined in the international market.
• This means that India will have to pay more Indian rupees to buy one unit of foreign currency. This also means that the foreign currency has become expensive and hence value of Indian rupees has fallen.
• Suppose, the exchange rate is US $ 1 = ₹ 60
• When exchange rate rises for India, US $ 1 = ₹ 65. When exchange rate falls for India, US $ 1 = ₹ 57.
• It should be noted that in reality, the actual analysis of rise or fall in the value of a currency, the time gap between the rise or fall in value of the currency, prices of goods in the various countries, etc. are taken into consideration for deciding the exchange rate.

Impact of exchange rate:

Rise or fall in exchange rate has a major impact on our import and export trade.

Impact on import:

When the exchange rate rises for India, the value of Indian rupee (₹) falls. So, India has to pay more rupees to purchase foreign goods i.e. importing becomes costlier. As a result, the demand for imported goods decline.

Impact on export:

In terms of export, when the exchange rate rises for India, India can export more quantity of goods in lesser amounts. This boosts export trade.

• For example, if earlier by spending US $ 1, a foreign trader could purchase goods worth ₹ 60, then now he can buy goods worth ₹ 65. Hence, export ₹ from India tend to rise.
• The reverse happens when exchange rate for India falls.