Vs.

By,
Sunil Kumar .s
 A pegged, or fixed system, is one in which the exchange
rate is set and artificially maintained by the government.

 The rate will be pegged to some other country's

currency, usually the U.S. dollar.

 The rate will not fluctuate from day to day. A

government has to work to keep their pegged rate stable.

 Using a simplistic example if 1 kg of potatoes can be

purchased with 1 US dollar in the US and 2 Euros in Europe
then 1 US$ is equivalent to 2 Euros , that is,
The Exchange Rate of US$ To Euro should be 2. this is called
the Pegged system.
The market determines a floating exchange rate. In other words, a
currency is worth whatever buyers are willing to pay for it.
This is determined by supply and demand, which is in turn driven by
foreign investment, import/export ratios, inflation, and a host of other
economic factors.
Generally, countries with mature, stable economic markets will use a
floating system. Virtually every major nation uses this system, including the
U.S., Canada and Great Britain. Floating exchange rates are considered
more efficient, because the market will automatically correct the rate to
reflect inflation and other economic forces.
The floating system isn't perfect, though. If a country's economy suffers
from instability, a floating system will discourage investment. Investors
could fall victim to wild swings in the exchange rates, as well as
disastrous inflation.
Punch marked silver ingots was in circulation around the 5th
century BC and the first metallic coins were minted around 6th
century BC by the mahajanapadas of the gangetic plains were
the earliest traces of coinage in India. While India's many
kingdoms and rulers issued coins, barter was still widely
prevalent. villages paid a portion of their agricultural produce as
revenue while its craftsmen received a stipend out of the crops
at harvest time for their services. Each village, as an economic
unit, was mostly self-sufficient.
 The rupee was historically linked I.E. Pegged to the pound sterling.
Earlier, during British regime and till late sixties, most of India's trade
transactions were dominated to pound sterling. Under Breton woods
system, as A member of IMF Indian declared its par value of rupee in
terms of gold. The corresponding rupee sterling rate was fixed 1 GBP =
RS 18.

 Countries such as Japan, which did not have the necessary access
to gold or those such as India, which were subject to imperial
policies that determined that they did not move to a gold standard,
remained mostly on a silver standard. A huge divide between silver-
based and gold-based economies resulted.
In 1966, foreign aid, which was hitherto a key factor in preventing
devaluation of the rupee was finally cut off and India was told it had to
liberalize its restrictions on trade before foreign aid would again
materialize. The response was the politically unpopular step of devaluation
accompanied by liberalization.
 Furthermore, The Indo-Pakistani War of 1965 led the US and other
countries friendly towards Pakistan to withdraw foreign aid to India, which
further necessitated devaluation. Defense spending in 1965/1966 was
24.06% of total expenditure, the highest it has been in the period from
1965 to 1989 . The second factor is the drought of 1965/1966. The sharp
rise in prices in this period, which led to devaluation, was often blamed on
the drought by government.
At the end of 1969, the Indian Rupee was trading at around 13 British
Pence. A decade later, by 1979, it was trading at around 6 British Pence.
Finally by the end of 1989, the Indian Rupee had plunged to an all-time
low of 3 British Pence. This triggered the onset of a wave of irreversible
liberalization reforms away from populist measures.
In 1991, India still had a fixed exchange rate system, where the
rupee was pegged to the value of a basket of currencies of major
trading partners. India started having balance of payments problems
since 1985, and by the end of 1990, it found itself in serious
economic trouble. The government was close to default and its
foreign exchange reserves had dried up to the point that India could
barely finance three weeks’ worth of imports. As in 1966, India
faced high inflation and large government budget deficits. This led
the government to devalue the rupee.
At the end of 1999, the Indian Rupee was devalued considerably.
In the period 2000–2007, the Rupee stopped declining and stabilized
ranging between 1 USD = INR 44–48.
In recent times, the Indian Rupee had begun to gain value and by 2007
traded around 39 Rs to 1 US dollar , on sustained foreign investment
flows into the country. This posed problems for major exporters and
BPO firms located in the country. The trend has reversed lately with
the 2008 world financial crisis. The changes in the relative value of the
rupee has reflected that of most currencies, e.g. the British Pound,
which had gained value against the dollar and then has lost value again
with the recession of 2008.
Valuation history
For centuries the currencies of the world were backed by gold. That is, a piece
of paper currency issued by any world government represented a real amount of
gold held in a vault by that government.

In the 1930s, the U.S. set the value of the dollar at a single, unchanging
level: 1 ounce of gold was worth $35.

 After World War II, other countries based the value of their currencies on the
U.S. dollar. Since everyone knew how much gold a U.S. dollar was worth, then
the value of any other currency against the dollar could be based on its value in
gold.
A currency worth twice as much gold as a U.S dollar was, therefore, also worth two U.S.
dollars.
 Unfortunately, the real world of economics outpaced this system. The
U.S. dollar suffered from inflation (its value relative to the goods it could
purchase decreased), while other currencies became more valuable and
more stable. Eventually, the U.S. could no longer pretend that the dollar was
worth as much as it had been, so the value was officially reduced so that 1
ounce of gold was now worth $70. The dollar's value was cut in half.

 Finally, in 1971, the U.S. Took away the gold standard altogether. This meant
that the dollar no longer represented an actual amount of a precious substance
market forces alone determined its value.

 Today, the U.S. Dollar still dominates many financial markets. In fact,
Exchange Rates are often expressed in terms of U.S. Dollars. Currently, the U.S.
Dollar and the euro account for approximately 50 percent of all currency exchange
transactions in the world. Adding British pounds, canadian dollars, australian
dollars, and japanese yen to the list accounts for over 80 percent of currency
exchanges altogether.
Just as exporters earn dollars, importers spend them. Imports are thus the most
important source of demand for dollars. 

Another major source of demand is individuals or companies repatriating

incomes or profits to their home countries. 

This would include portfolio investors as well as Indian branches of

multinationals sending back some of their profits to the parent company as
dividends. 

A third source would be Indians investing abroad, whether as firms or as

individuals. Besides this, of course, the forex you buy when you travel abroad is
also adding to the demand for dollars. 

As you can see, the factors that contribute to the demand for dollars are mirror
images of those that add to their supply.
As should be clear by now, this is because the demand for dollars is surging when
its supply is not. A couple of factors have been particularly crucial in this. 

•First, the trade deficit the gap between the value of our imports and that of our
exports has been widening, meaning exporters are earning a smaller proportion of
the dollars that importers need. The high prices of crude oil have been a large, but
not the only, factor. 

Second, Foreign institutional investors (FIIs) who had been pumping billions of
dollars every year into a booming Indian stock exchange have this year been
equally desperately pulling out their money thanks to the financial crisis facing
them in their home market.
What can the RBI do about it?

With hundreds of billions of dollars in its reserves, the

RBI would seem to have the ability to be a major factor
in how the dollar moves. 

If, for instance, it were to dump a huge amount of dollars

in the market, it could dramatically add to the supply
and hence reduce the price. There are at least two major
reasons why central banks are reluctant to do this. 

First, they do not like to interfere too much with market

valuation of currencies, though they do try and contain
excessive volatility. 

Second, every time the RBI sells dollars, it buys up

rupees, thus sucking some liquidity out of the system.
Given the current liquidity crunch, that is obviously not
something it would be very keen to do.
The answer is less simple than it might seem. Exporters clearly gain when
there is a depreciation, since they can price their goods cheaper in dollars and
yet earn the same amount of rupees, making them more competitive
internationally. 
However, importers lose because their costs go up and since they are likely to
pass this on to consumers it means costs in the economy rise.
In theory, as import costs rise, imports should fall and with exports rising the
trade gap should close thereby correcting the demand-supply mismatch in
dollars and leading to the rupee appreciating again. 
In practice, this often does not happen. One reason is that not all imports may
be price elastic that is, some imports might not be reduced despite higher
costs. The same may be true in exports, where some exports may not gain
since their demand is not price elastic. Also, other factors including
speculation may more than offset any reduction in the trade deficit.
The volatility in the foreign exchange rates depends upon a numerous
macro economic factors that have different degrees of importance to
different economies of the world. Some special and exceptional factors
affecting the rates may also exist in the case of different countries. Following
are shown the common factors on which the foreign exchange rate depends
Flow of imports and exports between the countries
Flow of capital between the countries
Relative inflation rates
Fluctuation limits on exchange rate imposed by the governments of the
countries
Merchandise trade balance
Rate of inflation in the country
Flow of funds between the countries for the payment of stock and bond
purchases
Relative growth
Short term and long term interest rate differentials
Cost of borrowings
 Exchange rate (rupees
Year
per US$)
1970 7.576
1975 8.409
1980 7.887
1985 12.369
1990 17.504
1995 32.427
2000 45.000
2006 48.336
2007 (Oct) 38.48
2008 (June) 42.51
2008 (October) 48.88
2009 (October) 46.37
2010 (January 22) 46.21
2011 (march 3rd) 44.95
“Indians are poor but India is not a poor
country”. Says one of the Swiss bank directors.
He says that “280 lack crore” of Indian money is
deposited in Swiss banks which can be used for
‘tax less’ budget for 30 yrs. “Can give 60 crore
jobs to all Indians. From any village to Delhi 4
lane road. Every citizen can get monthly 2000/-
for 60 yrs. No need of world bank & IMF loan.
Think how our money is blocked by rich
politicians. We have full right against corrupt
politicians.
India is currently the fourth and is likely to become the world’s largest
economy worth $85.97 trillion in a matter of just 40 years, surpassing
China and the US.
“China should overtake the US to become the largest economy in the
world by 2020, then be overtaken by India by 2050,” said a report by
financial services group Citi on Global Growth Generators.
The estimates are based on purchasing power parity (PPP), an
economic growth indicator that takes into account the purchasing
power of each country’s currency, instead of the prevailing exchange
rate conversion. According to the report, India’s real per capita GDP is
likely to grow at 6.4 per cent annually over the 40-year period between
2010 and 2050. While by 2015, it will overtake Japan to be the third
largest economy in the world, it would surpass the US to become the
second largest by 2040. “India is truly an emerging markets economy
as regards the sectoral composition of its production and labour force,”
the report said but added that “India’s assets are many.”