The proponents of the flexible exchange rate have not only rebutted these charges but also have put forward strong arguments in favour of flexible exchange rate.Īrguments in favour of Flexible Exchange Rate:įirst, flexible exchange rate provides a good deal of autonomy in respect of domestic policies as it does not require any obligatory constraints. It is often argued that flexible exchange rate causes destabilization, uncertainty, risk and speculation. They have challenged all the arguments against the flexible exchange rate. The advocates of flexible exchange rate have put forward equally convincing arguments in its favour. When the exchange rate is decided by the market force (demand and supply of currency), it is called the flexible exchange rate. Lastly, it reduces the possibility of competitive exchange depreciation or devaluation of currencies. Third, It removes the possibility of speculative transactions in foreign exchange markets. Second, it creates a system for a smooth flow of foreign capital between the nations, as it gives assurance of fixed return on investment. In practice, however, most countries adopt a dual system: a fixed exchange rate for all official transactions and a market rate for private transactions.Īrguments in Favour of Fixed Exchange Rate:įirst, it provides stability in the markets, certainty about the future course of actions in the Foreign Exchange Market, and it eliminates the risk caused by the uncertainty. Any change in the official exchange rate is made by the monetary authority of the country in-consultation with the IMF. Private sale and purchase of foreign currency is suspended. To this end, the government undertakes to buy and sell the foreign currency-buy when it becomes weaker and sell when it gets stronger. Under fixed exchange rate system, the government assumes the responsibility of ensuring stability of exchange rate. The basic purpose of adopting fixed exchange rate system is to ensure stability in foreign trade and capital movements. However, flexibility is allowed within the upper and lower limits prescribed by the IMF, usually 1% up and down, under the normal conditions. It is also called 'pegged' exchange rate. Under the IMF system, the monetary authority of a member nation fixes the official value of its currency in terms of a reserve currency (usually the US dollar) or a basket of 'key currencies.' The exchange rate so determined is known as currency's par value. When the exchange rate between the domestic and foreign currencies is fixed by the monetary authority of a country and is not allowed to fluctuate beyond a limit, it is called fixed exchange rate.

The evolution of exchange management is discussed below: Since Independence, the exchange rate system in India has transited from a fixed exchange rate regime where the Indian rupee was pegged to the pound sterling on account of historic links with Britain to a basket-peg during the 1970s and 1980s and eventually to the present form of market-determined exchange rate regime since March 1993. Stabilizing the foreign exchange rate through spot and forward market. Providing short-term credit to the importers, and thereby facilitating the smooth flow of goods and services between the countries. Transferring currency from one market to other where it is needed in the transactions. The major functions of the foreign exchange include: The system of exchange rate works through the facility provided by the key players of the markets.

The buyers and sellers of foreign currency includes the, brokers, students, commercial banks, central banks, individual firms, foreign exchange brokers etc. Exchange rate is simply value of a currency in terms of another currency.

Shift exchange meaning