What does Interest rate parity (IRP) mean?

Interest rate parity (IRP) refers to the theoretical concept that the interest rate differential between two countries should be equal to the differential between the forward exchange rate and the spot exchange rate. In other words, if the interest rate in one country is higher than another, the forward exchange rate should reflect this difference to prevent arbitrage opportunities. IRP is used in international finance to explain the relationship between interest rates, exchange rates, and inflation rates.