"FOREIGN EXCHANGE RATE"

                         The foreign exchange rate is the rate at which the currency of a country is exchanged against the currency of another country. It is the price of one currency in terms of another currency. the exchange between rupee and dollar refers to the number of rupees exchanged or are required to be given to obtain one dollar. When we say the exchange rate is Rs. 60 = 1$, it expresses the price of one dollar in terms of rupees. Like the price of any other commodity, it is the price of a currency which we would like to purchase. The difference is that in the commodity market there is one currency in terms of which the value of all other goods and services is expressed, where as in the foreign currency for one unit of domestic currency- e.g. Rs. 1 = 2C. For all practical purposes the expression is in terms of price of an internationally accepted currency i.e. a vehicle currency.

Vehicle Currency :-
                           It is a widely accepted currency in international market. US dollar, Euro and Pound Sterling are some of the vehicle currencies. Many countries express their foreign exchange rates in these currencies.
                           Since August 1991, the US dollar is used as vehicle currency for the Indian rupee. Exchange rate in India is quoted in USD/INR, for example 1 $ = Rs. 60 or INR/USD Rs. 60 = $ 1.
                           Exchange rate is determined by demand for and supply of foreign exchange. Let us discuss the factors that influence the demand and supply.

*  DEMAND FOR FOREIGN EXCHANGE :-

1. Import of Goods :-
                       Import of goods contribute a major part of total imports. Consumer as well as capita goods are imported from other countries. Raw material and intermediate goods too may be required to be imported. Foreign exchange is demanded by people who import these goods. Demand for foreign exchange for this purpose depends on the price of the imports. Higher the prices of imports lesser is the demand for foreign exchange.
   
2. Import of Services :-
                          Import of services have been increasing in recent years. Services rendered by other countries which include banking, insurance, transport, communication, tourist services, educational services etc. are required to be paid in foreign exchange.
   
3. Unilateral Payments :-
                          Donations, gifts, reparations are all one sided payments without corresponding returns. Such payments create demand for foreign exchange.
   
4. Export of Capital :-
                          Repayment of debt, purchase of assets in foreign countries, investment in financial assets or direct investment, all require foreign money.

                            All the above categories of demand add up to the aggregate demand for foreign exchange. The total demand is inversely related to the price i.e. the exchange rate. At a higher price (Rs.60 = 1$) the demand is less than say at Rs.50 = 1$. Figure 10.1 explains the demand for foreign exchange.