How To Control Exchange Rate?

There are various factors which impact the exchange rate however, central bank controls the exchange rate in an economy. The most common method to control the exchange rate is by open market operations. In an open market sale, the state bank sells the bond to get money which reduces the money supply. As a result the exchange rate goes up. On the other hand, in an open market purchase the central bank buys the bonds and increases the money supply which lowers the value of the currency. Central bank also has foreign reserves and selling foreign reserves enhances the exchange rate of local currency and lower its value when foreign currency is bought. Moreover, the demand and the supply of currency determine the exchange rate therefore, by increasing or decreasing the money supply the state bank controls the exchange rates.