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Exchange Rate System in India
Exchange Rate System in India
Exchange Rate System in India
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The exchange rate regime has a big impact on world trade and
financial flows. The volume of such transactions and the speed at
which they are growing makes the exchange rate regime a central
piece of any national economic policy framework.
In Fig. 21.2, as one moves from point A on the left to point B on the
right, both the frequency of intervention by domestic monetary
authorities and required level of international reserves tend to be
lower.
Under a pure fixed-exchange-rate regime (point A), authorities
intervene so that the value of the domestic currency vis-a-vis the
currency of another country, say the US Dollar, is maintained at a
constant rate. Under a freely floating exchange-rate regime,
authorities do not intervene in the market for foreign exchange and
there is minimal need for international reserves.
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iv. RBI can intervene in the market to modulate the volatility and
sharp depreciation of the rupee. It effects transactions at a rate of
exchange, which could change within a margin of 5 per cent of the
prevailing market rate.
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Intervention by RBI:
The current exchange rate regime, introduced in 1993, the RBI has
been, actively intervening in the foreign exchange market with the
objective of maintaining the real effective exchange rate (REER)
stable.
The RBI has been, in contrast, saying that there cannot be such
rigidities in exchange rate policy, and, therefore, the bank should
have the right to intervene at its discretion. Such interventions are
considered necessary till the rupee is made fully convertible.