You must have heard of Dollars, Euros, Pounds. These are called foreign currencies. Each of them has different values. For example, you will have to pay sixty-five Indian Rupees for one US Dollar, eighty rupees to buy one UK pound, and so on. The conversion rate of one unit of a currency for another currency is known as the exchange rate. The foreign currencies trade in the global currency market.
showing the exchange rate of Indian rupee with US Dollar,s, i.e., We need to pay 70 rupees to purchase 1 dollar
As you know, RBI is the central bank in the Indian monetary system, but The RBI doesn’t cater to the USA’s money supply or that of any other country. Each country has its central bank, which functions similarly. Therefore, when we travel to the USA, we have to convert Indian Rupees into US Dollars for the money to make transactions.
However, there are instances where the Indian Rupee or other currencies are accepted as a medium of exchange in a foreign country, but that would be subject to restrictions. Few countries like Ecuador don’t have their currency and have adopted another country’s official currency as their own.
But why can no one hold a considerable amount of US dollars or pounds? There are restrictions on the amount of foreign exchange a person can hold as too much foreign currency will weaken the home currency. In other words, you will have to pay more Indian Rupees for one unit of foreign currency. In such instances, the RBI steps in and uses its foreign exchange reserve to restore the balance and strengthen the Indian Rupee.
THINK ABOUT IT! Can you favourite a few country’s currencies?