Exchange rate policy

See also how monetary policy works, how decisions are made and related backgrounders. The Objective The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living.

Exchange rate policy

Exchange rate fluctuations affect the value of international investment portfolios, competitiveness of exports and imports, value of international reserves, currency value of debt payments, and the cost to tourists in terms of the value of their currency.

The study covers two main topics: The Indian foreign exchange market has evolved over time as a deep, liquid and efficient market as against a highly regulated market prior to the s.

The market participants have become sophisticated, the range of instruments available for trading has increased, the turnover has also increased, while the bid—ask spreads have declined.

This study also covers the exchange rate policy of India in the background of large capital flows, The study then attempts to develop a model for the rupee-dollar exchange rate taking into account variables from monetary and micro structure models as well as other variables including intervention by the central bank.

To model the exchange rate, the monetary model is expanded to include variables that may have been important in determining exchange rate movements in India such as forward premia, capital flows, order flows and central bank intervention.

With the breakdown of the Bretton Woods System inthe rupee was linked with pound sterling. In order to overcome the weaknesses associated with a single currency peg and to ensure stability of the exchange rate, the rupee, with effect from Septemberwas pegged to a basket of currencies till the early s.

What is an 'Exchange Rate'

The initiation of economic reforms saw, among other measures, a two step downward exchange rate adjustment by 9 per cent and 11 per cent between July 1 and 3, to counter the massive draw down in the foreign exchange reserves, to install confidence in the investors and to improve domestic competitiveness.

The dual exchange rate system was replaced by a unified exchange rate system in March Episodes of volatility were effectively managed through timely monetary and administrative measures. An important aspect of the policy response in India to the various episodes of volatility has been market intervention combined with monetary and administrative measures to meet the threats to financial stability while complementary or parallel recourse has been taken to communications through speeches and press releases.

In line with the exchange rate policy, it has also been observed that the Indian rupee is moving along with the economic fundamentals in the post-reform period. Moving forward, as India progresses towards full capital account convertibility and gets more and more integrated with the rest of the world, managing periods of volatility is bound to pose greater challenges in view of the impossible trinity of independent monetary policy, open capital account and exchange rate management.

Preserving stability in the market would require more flexibility, adaptability and innovations with regard to the strategy for liquidity management as well as exchange rate management. With the likely turnover in the foreign exchange market rising in future, further development of the foreign exchange market will be crucial to manage the associated risks.

Structure of the Indian Foreign Exchange Market and Turnover Prior to the s, the Indian foreign exchange market with a pegged exchange rate regime was highly regulated with restrictions on transactions, participants and use of instruments. The period since the early s has witnessed a wide range of regulatory and institutional reforms resulting in substantial development of the rupee exchange market as it is observed today.

Market participants have become sophisticated and have acquired reasonable expertise in using various instruments and managing risks.

Exchange rate policy

The foreign exchange market in India today is equipped with several derivative instruments. Various informal forms of derivatives contracts have existed since time immemorial though the formal introduction of a variety of instruments in the foreign exchange derivatives market started only in the post reform period, especially since the mids.


These derivative instruments have been cautiously introduced as part of the reforms in a phased manner, both for product diversity and more importantly as a risk management tool. Trading volumes in the Indian foreign exchange market has grown significantly over the last few years.

The pickup has been particularly sharp from onwards since when there was a massive surge in capital inflows. Reflecting these trends, the share of India in global foreign exchange market turnover trebled from 0.

With the increasing integration of the Indian economy with the rest of the world, the efficiency in the foreign exchange market has improved as evident from low bid-ask spreads.

It is found that the spread is almost flat and very low.

China's exchange rate trap | Business | The Guardian

In India, the normal spot market quote has a spread of rate policy last August, and uncertain growth prospects in China, with falling oil prices amplifying some of the market volatility. The lower price of oil has had a . A realistic exchange rate is a crucial element of the policy framework necessary for increasing private investment.

Depreciation of the rupee was an important element of the liberalization package of The choice of exchange rate regimes in East Asia has been a focus of attention among policy makers and economic researchers since the Asian financial crisis in the late s. determination of output, the interest rate, and the exchange rate.

CONVENTIONAL wisdom tells us that a national currency should be allowed to depreciate to an ‘effective’ market exchange rate to boost exports. However, a recent related report in the Financial. Problematic. Exchange rate policy is regarded as the most problematic international monetary issue in the world and Guyana had to confront that problem from the time it became an independent nation. Exchange rate and monetary policy choices – the theory Countries have some choice over the combination of policies – monetary independence, exchange rate stability and financial integration – that they adopt but cannot have all three at once.

Section 20{4 looks at the role of policy under °exible exchange rates. Section 20{5 looks at the role of policy under flxed exchange rates.

The exchange rate of an economy affects aggregate demand through its effect on export and import prices, and policy makers may exploit this connection. Foreign exchange rates are of particular concern to governments because changes in FX rates affect the value of products and financial instruments.

As a result, unexpected or large changes can affect the health of nations' markets and financial systems.

Exchange Rate Policy at the Monetary Authority of Singapore - New York Essays