Exchange rate is the price of one currency expressed in terms of another currency. Exchange rate is determined by equality of demand and supply of foreign exchange.
In the words of Crowther, “The rate of exchange measures number of units of one currency which are exchanged for one unit of another.”
Favourable and unfavourable exchange rates: To find out whether the exchange rate is favourable or unfavourable, we should find out whether the exchange rate is in our domestic currency or in foreign currency. Any exchange rate which is favourable for our country will be unfavourable for another country.
Therefore, there are two conditions :
(i) Exchange rate applicable in domestic currency : In this situation, decreasing, exchange rate is in the country’s favour and increasing exchange rate is unfavourable. For example, if one dollar costed Rs. 25 earlier and after change it becomes one dollar = Rs. 15, then this exchange rate will be favourable for us because now we have to pay Rs. 15 instead of Rs. 25 for purchasing one dollar worth goods. If, against this, one dollar’s value becomes Rs. 30, then this will be unfavourable exchange rate for us because we will have to pay Rs. 30 in place of Rs. 25 now.
(ii) Exchange rate is applicable in foreign currency : In this situation, increasing exchange rate will be in our favour and decreasing exchange will be an unfavourable situation. For example: If present exchange rate is Rs. 1 = 70 Euro and its changed rate is Rs. 1 = 90 Euro, it will be in favour of our country and Rs. 1 = 50 Euro will be unfavourable situation for the country.
