Direct Answer
The foreign exchange market is the mechanism by which currencies are traded, and its rates are influenced by macro factors like inflation and interest rates
Statement I is correct. Unlike equity markets, the forex market is an Over-The-Counter market. It operates 24 hours a day through an electronic network of banks, corporations, and individuals without a central physical trading floor. Statement II is incorrect. The Purchasing Power Parity theory states that exchange rates adjust to offset differences in inflation between two countries. High inflation in India erodes the purchasing power of the Rupee. Therefore, higher inflation in India relative to the United States leads to the depreciation, not appreciation, of the Indian Rupee against the US Dollar. Statement III is correct. When the Reserve Bank of India raises interest rates, domestic debt instruments yield higher returns. This attracts foreign institutional investors looking for yield, increasing the demand for the Indian Rupee, and causing it to appreciate in the short term. Historical and Related Context: Central banks heavily monitor these dual factors, inflation and interest rates, to manage their currency strength in global trade.