Exchange rate system, Microeconomics

Assignment Help:

EXCHANGE RATE SYSTEM:

It is interesting to look at a case study of a country like India for several reasons: first it is a small country in terms of imports and exports as a proportion of world imports and exports. Secondly, it is a developing nation that had an experience of being colonised. Thirdly, the government intervened heavily in the foreign exchange market, and over the lat 15 years or so, there has been liberalisation, whereby the government has liberalised the exchange rate policy. Finally, and related to the above point is the fact that India has changed its exchange rate regime from an earlier fixed one to a new one. Also the exchange control system has changed.

Let us now study the exchange rate mechanism and system operative in India and explore how it has undergone changes over the years. Before the IMF came into being, the rupee was linked to the pound sterling. In India, there was a sterling exchange standard till 1947. When India became a member of the IMF, the rupee-pound sterling link was severed, and the rupee's par value came to be expressed in gold. Since in the Bretton Woods system, gold was linked to the US dollar, the dollar in effect became the intervention currency. But the exchange value of the rupee in terms of the pound sterling was not disturbed. When the pound was devalued in 1949, the rupee was devalued to an identical extent. 

However, the devaluation of the rupee in 1949 and later in 1966 led to the reduction of the par value of the rupee in terms of gold.
In 1971, after the USA left the fixed exchange regime, the rupee-pound rate was allowed to fluctuate with reference to the par value of the rupee in terms of the US dollar, even though the gold parity as well as the US dollar parity of the rupee as fixed in June 1966 remained unchanged. This arrangement lasted only from August to December 1971. In December 1971, the pegging of the exchange rate of the rupee to the dollar was given up and a central rate of the rupee as an average of the buying and selling rates of the RBI for the pound came to be adopted. This arrangement continued till September 24, 1975 when the rupee was de-linked from the pound sterling. The rupee was pegged to gold and sterling till 1966, to gold and dollar from 1966 to 1971, and again to sterling from 1971 to 1975. 

From September 25, 1975, the exchange value of the rupee was determined with reference to the daily exchange rate movements of a selected number of currencies of countries that were major trading partners of India. The selection of the currency units and the weights to be assigned to them was left to the discretion of the RBI, subject to the approval of the government. Thus, the rupee came to be linked to an undisclosed basket of currencies. It was undisclosed in order to discourage speculation in the foreign exchange market. Even when the rupee was pegged to the basket of currencies, the pound sterling continued to be the currency of intervention. Under this arrangement, the value of the domestic currency (rupee) with respect to the intervention currency (pound) was changed in line with the movements in the weighted average of the value of the trading partners' currencies vis- a-vis the intervention currency.


Related Discussions:- Exchange rate system

Growth of production, GROWTH OF PRODUCTION: The performance of Indian ...

GROWTH OF PRODUCTION: The performance of Indian agriculture during more than half a century of planned economic development can be broadly characterised by three distinct phas

Define debt, Q. Define Debt? Debt:Total amount of money owed by a compa...

Q. Define Debt? Debt:Total amount of money owed by a company, individual or other organization to banks or other lenders is their debt. It represents accumulated total of past

Mass, what is the mass of a body when it is taken to the moon

what is the mass of a body when it is taken to the moon

Land, explain land as a part of the four factors of production

explain land as a part of the four factors of production

Market supply of labour, #queUse a graphical illustration to describe brief...

#queUse a graphical illustration to describe briefly what the influence of each of the following would be on the market supply of labor:(a) an increase in immigration (b) more wome

Consumer theory, what are the similarities and differences of marginal prod...

what are the similarities and differences of marginal productivity and marginal utility

Mba, Is Indian companies running a risk by not giving attention to cost cut...

Is Indian companies running a risk by not giving attention to cost cutting

Production function curve, different types of production funtion and curve ...

different types of production funtion and curve given by different economist

Elasticity, Calculate the price elasticity of demand or supply for the foll...

Calculate the price elasticity of demand or supply for the following function when P=8 p=6(I)p=40-0.5q

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd