Under flexible exchange rate system, the exchange rate is determined

Under a flexible or floating exchange rate system, the value of a currency is determined by the market forces of demand and supply [3]. In this regime, the exchange rate is established where the demand curve for a currency intersects with its supply curve in the foreign exchange market [1]. Unlike a fixed exchange rate system where the government or Central Bank sets a specific value [5], a completely flexible system operates without Central Bank intervention [1]. While some variations like 'managed floating' involve occasional Central Bank intervention to moderate excessive fluctuations [4], the fundamental characteristic of a flexible system is that the rate is predominantly market-determined [2]. This contrasts with a weighted index approach, which is used to measure a currency's broad value (Trade Weighted Index) rather than determine its daily market rate . The World Trade Organization does not determine exchange rates.

Sources

1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Flexible Exchange Rate > p. 92
2. [3] India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > New words > p. 77
3. [5] https://www.investopedia.com/trading/floating-rate-vs-fixed-rate/
4. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Under this regime, there exist two types of systems: > p. 493
5. [4] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.2.4 Managed Floating > p. 95