Exchange Rate is the price of one currency in terms of another; determined by supply and demand in foreign exchange markets. Types: Nominal exchange rate (stated rate), Real exchange rate (adjusted for inflation differences, shows purchasing power). Fixed vs. Floating: Fixed (government sets, maintains through interventions), Floating (market-determined, flexible). Floating rate determination: Demand for imports increases foreign currency demand; Supply of exports increases foreign currency supply. Appreciation: Currency becomes more valuable (stronger), exports more expensive, imports cheaper. Depreciation: Currency becomes less valuable (weaker), exports cheaper, imports more expensive. Purchasing Power Parity (PPP): Long-run exchange rate reflects price level ratios between countries; undervalued currencies show growth potential. Interest rate parity: High-interest-rate currencies tend to depreciate (forward premium). Managed float: Hybrid approach; government influences but doesn't fix rate. Overshooting: Currency initially overshoots long-run value due to capital flows, then adjusts. Exchange rate pass-through: How much exchange rate change affects prices (import/export prices). Indian context: Rupee floats since 1992; appreciation with capital inflows, depreciation with outflows; oil prices significantly affect; external pressures from deficits. ICAI focus: Determinants of exchange rates, appreciation/depreciation effects. Exam tip: "Stronger currency helps importers, hurts exporters; weaker currency helps exporters, hurts importers."