Under flexible or floating exchange rate regime, the exchange rate is determined by the interaction of market forces of demand and supply of foreign exchange in international market.

Central Bank does not intervene in foreign exchange market in deciding the exchange rate system.

Let us explain it with help of the following diagram

In the above diagram –

•OX represents the Amount of Foreign Exchange

•OY represents the Exchange Rate

•DD is the downward sloping demand curve for foreign exchange

•SS denotes the upward sloping supply curve of foreign exchange

•X is the equilibrium point where demand and supply of foreign exchange are equal

•Oe denotes the equilibrium exchange rate

•Om denotes the equilibrium amount of foreign exchange