Floating exchange rate refers to the exchange rate which is determined by the conditions of demand for and supply of the foreign exchange in the exchange market.
Advantages of Floating or Flexible Exchange Rate System:
i. Under the flexible exchange rate system, foreign exchange market clears automatically by supply of and demand for foreign exchange. There is no need for any agency to intervene in the exchange market.
ii. It is helpful to do away with the barriers to international trade and international capital movements.
iii. Under the floating exchange rate system, there is no need for the central bank to hold international reserves.
iv. Flexible exchange rate system increase the efficiency in the economy by achieving optimum resources allocation.