Question

Exchange rate is the price of one currency in terms of another currency. The exchange rate depends upon

1. Inflation

2. Interest rates in the country and global majors like USA

3. International commodity prices

4. Political stability

5. Forex reserves with RBI

Select the correct answer code:

1. 1, 2, 3, 4
2. 1, 3, 4, 5
3. 1, 4, 5
4. 1, 2, 3, 4, 5

Answer 1

Correct Answer - Option 4 : 1, 2, 3, 4, 5

The correct answer is 1, 2, 3, 4, 5.

• Exchange rate is the price of foreign currency (USD, Yen, Euro, Pound etc) in terms of domestic currency (rupee) i.e. amount of domestic currency needed to buy one unit of foreign currency.
• Exchange rate tells us the value of domestic currency in relation to one unit of foreign currency.

The exchange rate depends upon many factors. They are:

• Inflation
• Interest rates in the country and global majors like USA
• International commodity prices
• Political stability
• Forex reserves with RBI
• Growth rate of the economy
• Future potential
• Foreign trade profile which includes import dependency
• Monetary policy of countries like USA
• External debt levels, particularly the short-term commercial debt level
• The extent of convertibility of the currency
• Fiscal and Current account deficits