The equation of exchange states that all dollars in existence is equal to production plus inflation. The reason for this is because money gets it's value from production, so any changes to the money supply will change the price of money. The value of all dollars in circulation will always equal the sum of all production.

Inflation is added into the equation because the value of money is influenced by inflation. But in order to get the real value of money, you need to use real rates. So the right hand side of the equation is describing the value of money, which should include real rates. The equation is missing rates.