Exchange rate system in India
INTRODUCTION
India has witnessed recent episode of excessive volatility leading to sudden and sharp
Depreciation of Indian Rupee against US Dollar. In 2013, the Indian Rupee breached the 57 per Dollar mark & reached to 65- its all-time low against Dollar. International trade and investment decisions become more difficult due to volatile exchange rate because volatility increases exchange rate risk. If the participants in international trade are aware about exchange rate risks, they may prefer to switch to domestic activities where profits are relatively less uncertain rather than continuing trading in foreign markets. Alternatively, international traders may attempt to use forward foreign exchange markets in order to hedge against any possible losses.
EXCHANGE RATE SYSTEM IN INDIA
The exchange rate regime in our country has undergone a significant change during 1990s. Until February 1992, exchange rate in India was fixed by the Reserve Bank of India. Thereafter a dual exchange rate system was adopted during March 1992 to February 1993 which also came to an end and a unified market came into being in March 1993. The present exchange rate regime in India is popularly known as managed floating with no fixed target. It is said that because of this regime, India reaps the benefit of flexible exchange rate system on the one hand and less volatility in the foreign exchange market on the other. It has been observed that our economy witnessed nearly a constant exchange rate during March 1993 to August 1995.
ADVANTAGES
There were two arguments in the favour of Flexible Exchange Rate System. The first argument is related to the competitive position of a country in the international market. For e.g. if a price level in a country rises, it will make its products & services uncompetitive in international market and the balance of payments will suffer from a deficit. In order to keep equilibrium in the balance of payments, the country may use various macroeconomic
India has witnessed recent episode of excessive volatility leading to sudden and sharp
Depreciation of Indian Rupee against US Dollar. In 2013, the Indian Rupee breached the 57 per Dollar mark & reached to 65- its all-time low against Dollar. International trade and investment decisions become more difficult due to volatile exchange rate because volatility increases exchange rate risk. If the participants in international trade are aware about exchange rate risks, they may prefer to switch to domestic activities where profits are relatively less uncertain rather than continuing trading in foreign markets. Alternatively, international traders may attempt to use forward foreign exchange markets in order to hedge against any possible losses.
EXCHANGE RATE SYSTEM IN INDIA
The exchange rate regime in our country has undergone a significant change during 1990s. Until February 1992, exchange rate in India was fixed by the Reserve Bank of India. Thereafter a dual exchange rate system was adopted during March 1992 to February 1993 which also came to an end and a unified market came into being in March 1993. The present exchange rate regime in India is popularly known as managed floating with no fixed target. It is said that because of this regime, India reaps the benefit of flexible exchange rate system on the one hand and less volatility in the foreign exchange market on the other. It has been observed that our economy witnessed nearly a constant exchange rate during March 1993 to August 1995.
ADVANTAGES
There were two arguments in the favour of Flexible Exchange Rate System. The first argument is related to the competitive position of a country in the international market. For e.g. if a price level in a country rises, it will make its products & services uncompetitive in international market and the balance of payments will suffer from a deficit. In order to keep equilibrium in the balance of payments, the country may use various macroeconomic