How can the rbi help in bringing down foreign exchange when it is very high
Kunal,
When foreign exchange rate is high, it implies that the demand for the foreign currency is more and consequent of this high demand, the price of the foreign currency is high. Thus, to lower the demand of the foreign currency, RBI steps in and it sells the reserves of foreign currency to the general public. This fulfils the demand of general public for the foreign currency and hence, lower the foreign exchange rate. On the contrary, RBI purchases the foreign currency, when the foreign exchange rate is low.
When foreign exchange rate is high, it implies that the demand for the foreign currency is more and consequent of this high demand, the price of the foreign currency is high. Thus, to lower the demand of the foreign currency, RBI steps in and it sells the reserves of foreign currency to the general public. This fulfils the demand of general public for the foreign currency and hence, lower the foreign exchange rate. On the contrary, RBI purchases the foreign currency, when the foreign exchange rate is low.