Fixed exchange rate and flexible exchange rate are two exchange rate

systems, differ in the sense that when the exchange rate of the country is
attached to the another currency or gold prices, is called fixed exchange
rate, whereas if it depends on the supply and demand of money in the
market is called flexible exchange rate.

The depreciation of Indian Rupee against US dollar is the common

headline of almost all news dailies, since past few years. Not only India but
the primary concern of the monetary policy of all the countries focus on
stabilising the exchange rate. However, still, a major section of society is
unaware about currency fluctuations in the international market, as they do
not have sufficient knowledge.

Definition of Fixed Exchange Rate

An exchange rate regime, also known as the pegged exchange rate, wherein
the government and central bank attempts to keep the value of the currency
is fixed against the value of other currencies, is called fixed exchange rate.
Under this system, the flexibility of exchange rate (if any) is permitted,
under IMF (International Monetary Fund) arrangement, but up to a certain
extent.

In India, when the currency price is fixed, an official price of its currency in
reserve currency is issued by the apex bank, i.e. Reserve Bank of India.
After the determination of the rate, the RBI undertakes to buy and sell
foreign exchange, and the private purchases and sales are postponed. The
central bank makes changes in the exchange rate (if necessary).
Definition of Flexible Exchange Rate

A monetary system, wherein the exchange rate is set according to the

demand and supply forces, is known as flexible or floating exchange rate.
The economic position of the country determines the market demand and
supply for its currency.

In this system, the currency price is market determined, concerning other

currencies, i.e. the higher the demand for a particular currency, the higher
is its exchange rate and the lower the demand, the lesser is the value of
currency compared to other currencies. Therefore, the exchange rate is not
under the control of the government or central bank.
Key Differences Between Fixed and Flexible Exchange Rates

The following points are noteworthy so far as the difference between fixed
and flexible exchange rates is concerned:

1. The exchange rate which the government sets and maintains at the
same level is called fixed exchange rate. The exchange rate that
variates with the variation in market forces is called flexible exchange
rate.
2. The fixed exchange rate is determined by government or the central
bank of the country. On the other hand, the flexible exchange rate is
fixed by demand and supply forces.
3. In fixed exchange rate regime, a reduction in the par value of the
currency is termed as devaluation and a rise as the revaluation. On
the other hand, in the flexible exchange rate system, the decrease in
currency price is regarded as depreciation and increase, as
appreciation.
4. Speculation is common in the flexible exchange rate. Conversely, in
the case of fixed exchange rate speculation takes place when there is a
rumour about change in government policy.
5. In fixed exchange rate, the self-adjusting mechanism operates
through variation in the supply of money, domestic interest rate and
price. As opposed to the flexible exchange rate that operates to
remove external instability by the change in forex rate.

Conclusion

As both the exchange rate system have their positive and negative aspects.
It is not possible for economists to reach a particular conclusion, so the
debate is indecisive.

theoreticians favour flexible exchange rate due to their reliance on the free
market system and price mechanism

policy makers and central bankers support fixed exchange rate system.
How to Determine Exchange Rates
through Supply and Demand
The demand–supply framework enables you to predict the next period’s exchange
rate. Keep the following in mind when applying the demand–supply model to
exchange rates:

 An exchange rate implies the relative price of a currency. For example, the
euro–dollar exchange rate tells you how many euros to give up to buy one
dollar. Therefore, this exchange rate implies the price of a dollar in euros.

 Certain forces affect the demand for and supply of dollars, or of any other
currency, in foreign exchange markets.

 The demand–supply model of exchange rate determination implies that the

equilibrium exchange rate changes when the factors that affect the demand and
supply conditions change.

Also, think about the meaning of the demand for and supply of dollars. Who are these
people that want to buy or sell dollars or any other currency? They are international
banks, multinational companies, speculators, and so on. Whenever they want to buy
dollars, they’ll be along the demand curve. Whenever they want to sell dollars, they’ll
be along the supply curve.

Price and quantity of the dollar market

If you want to graph the dollar market, the quantity on the x-axis must be the quantity
of dollars in the market. Therefore, the price indicated by the y-axis must be the price
of dollars in another currency (in this example, the euro). In other words, the exchange
rate has to be defined as the euro–dollar exchange rate.

Consequently, the demand and supply curves indicate the demand for and supply of
dollars. The figure shows the initial equilibrium exchange rate as €0.89 per dollar.
Factors that affect demand and supply
Ceteris paribus conditions are associated with the demand and supply of dollars.
These conditions are related to the macroeconomic fundamentals of two countries
represented in the exchange rate.

Because the example exchange rate is the euro–dollar rate, the following variables
may change in the U.S. or the Euro-zone, which then have an effect on the euro–dollar
exchange rate:

 Inflation rate

 Growth rate

 Interest rate

 Government restrictions

In the demand–supply model, these factors are divided into two areas based on how
they affect exchange rates. Inflation rate and growth rate are considered trade-related
factors.

The interest rate, on the other hand, is a portfolio flow–related factor. It means that
when one of the country’s interest rate changes, you think about how this change
affects the attractiveness of dollar- and euro-denominated securities to American and
European investors.

Government restrictions can be related to both trade flows and portfolio flows,
depending on the nature of these restrictions.
Forward Rates* - USD/INR
%ANNUALIZED
MONTH BID RATE ASK RATE BID-ASK SPREAD SPREAD CHANGE % PREMIUM/DISCOUNT

30 Nov 2019 71.0825 71.1125 0.030006 -4.07919 0.302505

31 Dec 2019 71.305 71.335 0.029999 2.197921 0.525002

31 Jan 2020 71.5425 71.5725 0.029999 2.197921 0.762505

29 Feb 2020 71.7575 71.7875 0.029999 2.197921 0.977501

31 Mar 2020 71.9975 72.0275 0.029999 2.197921 1.217499

30 Apr 2020 72.3425 72.3725 0.029999 -7.4096 1.5625

31 May 2020 72.5525 72.5825 0.029999 2.197921 1.772499

30 Jun 2020 72.7975 72.8275 0.029999 2.197921 2.017502

31 Jul 2020 73.0475 73.0775 0.029999 2.197921 2.267502

31 Aug 2020 73.2925 73.3225 0.029999 2.197921 2.512505

30 Sep 2020 73.5275 73.5575 0.030006 7.221475 2.747505

31 Oct 2020 73.7675 73.7975 0.029999 2.197921 2.987503

* End of Month Forwards

Forex Rates

CURRENCY PRICE CHANGE %CHANGE OPEN PREV.CLOSE DAY's LOW-HIGH

USD/INR 70.81 -0.130005 -0.18326 70.98 70.94 70.8025- 70.9975

EUR/USD 1.1161 0.0015 0.134578 1.1146 1.1146 1.1128- 1.1172

GBP/INR 91.7264 -0.184395 -0.200624 91.9288 91.9108 91.7147- 92.0044

EUR/INR 78.9903 -0.179695 -0.226974 79.3199 79.17 78.9437- 79.3199

USD/JPY 108.234 0.253998 0.235227 107.98 107.98 107.888- 108.325

GBP/USD 1.2933 -0.0004 -0.030915 1.2937 1.2937 1.2927- 1.2973

DXY Index 97.275 -0.076996 -0.07909 97.296 97.352 97.164- 97.367

JPY/INR 0.6562 -0.0009 -0.13697 0.6568 0.6571 0.656- 0.6577

USD/CAD 1.3145 -0.0017 -0.129163 1.3162 1.3162 1.314- 1.3196

USD/SGD 1.3575 -0.0035 -0.257163 1.361 1.361 1.3565- 1.3612

AUD/USD 0.6909 0.0021 0.304885 0.6888 0.6888 0.6884- 0.6922