BANKING AFFAIRS

Detailed explanation-1: -In a floating regime, exchange rates are generally determined by the market forces of supply and demand for foreign exchange. For many years, floating exchange rates have been the regime used by the world’s major currencies – that is, the US dollar, the euro area’s euro, the Japanese yen and the UK pound sterling.

Detailed explanation-2: -Since 1993, the Indian rupee (INR) has officially been following a market-determined exchange rate – price is determined by demand for and supply of foreign exchange – with intervention by the Reserve Bank of India from time-to-time.

Detailed explanation-3: -There is an inverse relationship between the rate of foreign exchange and demand for foreign exchange. It means the higher the rate, the lesser will be the demand for foreign exchange and vice-versa.

Detailed explanation-4: -The most important are five factors which are inflation, interest rate differentials, and differences in income level, government control and changes in expectations. These factors move the demand and supply schedule and create a new exchange rate in a new equilibrium condition.