| Definition |
The price of one currency in terms of another currency. |
The cost of borrowing money or the return on savings expressed as a percentage. |
| Measurement Unit |
Expressed as a ratio (e.g., 1 USD = 83 INR). |
Expressed as a percentage (e.g., 6.5% per annum). |
| Function |
Facilitates international trade and capital flows. |
Regulates borrowing, lending, investment, and consumption. |
| Determination |
Determined by foreign exchange market forces or central bank policy. |
Set by central banks (policy rate) and influenced by market demand-supply. |
| Types |
Fixed, floating, or managed exchange rate systems. |
Nominal, real, repo rate, reverse repo, bank lending rate. |
| Influencing Factors |
Trade balance, capital flows, inflation, interest rates, political stability. |
Inflation, monetary policy, liquidity, economic growth. |
| Impact on Inflation |
Depreciation raises import costs, fueling inflation; appreciation does the opposite. |
Higher interest rates reduce inflation; lower rates may fuel it. |
| Central Bank Role |
May intervene in forex market to stabilize or guide the exchange rate. |
Directly sets benchmark interest rates to control inflation and growth. |
| Effect on Investment |
Volatile exchange rates can affect foreign investments. |
High rates discourage borrowing/investment; low rates encourage it. |
| Effect on Foreign Trade |
Affects export and import competitiveness through currency valuation. |
Indirect impact by affecting cost of capital and inflation. |
| Economic Indicator |
Indicator of a country’s external economic health. |
Indicator of monetary policy stance and domestic economic conditions. |
| Fluctuation Frequency |
Can fluctuate daily or even hourly in forex markets. |
Changes less frequently, usually at monetary policy reviews. |
| Market Involvement |
Determined in foreign exchange markets. |
Influences money markets and bond markets. |
| Cross-border Impact |
Directly impacts global trade and capital flow. |
Impacts global capital movement through interest rate differentials. |
| Monetary Policy Tool |
Not directly a tool, but affected by policy changes. |
Primary tool of central banks to control money supply and inflation. |
| Volatility |
Highly volatile depending on economic and geopolitical news. |
Relatively stable and changed through policy decisions. |
| Influence on Consumers |
Affects prices of imported goods, foreign travel, and remittances. |
Affects loan EMIs, savings returns, and overall consumption. |
| Speculation |
Heavily traded and speculated in forex markets. |
Speculated in bond and interest rate derivative markets. |
| Global Comparability |
Comparative between two countries' currencies. |
Varies by country, but central banks observe global trends. |
Currency Exchange Rate vs Interest Rate