Advantages of fixed exchange rate

1. Avoid currency fluctuations.

2. Stability encourages investment

3. Keep inflation low.

4. Current account
Disadvantages of fixed exchange rate

1. Current account imbalances.

2. Difficulty in keeping the value of the currency 

3. Encourage speculative attacks

4. Less flexibility

5. Conflict with other macroeconomic objectives.

Advantage of Floating Exchange Rates:

1. Automatic Stabilisation

2. Freeing Internal Policy

3.  Absence of Crisis

4. Management

5. Flexibility

6. Avoiding Inflation

7. Lower Reserves
Disadvantages of Floating Exchange Rates:

1. Uncertainty

2. Lack of Investment

3. Speculation

4. Lack of Discipline
 BASIS FOR FIXED EXCHANGE FLEXIBLE
COMPARISON RATE EXCHANGE RATE
Meaning Fixed exchange rate Flexible exchange rate is
refers to a rate which the a rate that variate
government sets and according to the market
maintains at the same forces.
level.
Determined by Government or central Demand and Supply
bank forces
Changes in currency Devaluation and Depreciation and
price Revaluation Appreciation
Speculation Takes place when there Very common
is rumor about change in
government policy.
Self-adjusting Operates through Operates to remove
mechanism variation in supply of external instability by
money, domestic interest change in forex rate.
rate and price.
Factors influencing Foreign exchange rates
1. Inflation Rates

 2. Interest Rates

3. Country’s Current Account / Balance of Payments

4.Government Debt

5.Terms of Trade

6.Political Stability & Performance

7. Recession

8.Speculation
Exchange Rate Regime
Practices In India
Exchange rate refers to the price of a nation’s currency in terms
of another nation’s currency.

In other words, the domestic currency is expressed in terms of

the foreign currency.

For example, on 1st July 2018, 1 Dollar was equal to Rs.68.55.

This means that a person can buy goods worth Rs. 68.55 using
1 U.S. Dollar (USD) or vice versa.
1947-71

During this time period, India followed a fixed exchange rate

system under the Bretton Woods System.

Under the five-year plan system, from 1950 onwards, the Indian
government continuously borrowed money from foreign and
private sector savings.

The rate of borrowing and loans borne by the government

increased to a very high magnitude in 1960
1971-92

With the breaking down of the Bretton Woods system, India moved
towards the pegged exchange rate system. The Indian Rupee was
linked to U.K. Pound Sterling
1992 – 2018

There was a two-step devaluation of Rupee in 1991 by the RBI

which ended the pegged exchange rate system and marked the
beginning of the market determined exchange rate system.