ternal e tor in ndia          15.5
     it was the UK which blamed the system for its                          from which the floating currency regime
     payment crisis of late 1960s. Looking at the major                     basically emerged. The USA and the EU
     loopholes in this system, the UK government                            are the major examples in this category.
     decided to switch over to the floating currency                 (ii) Some economies have managed but
     regime in 1973—the same year the IMF allowed                           flexible exchange rates, under which the
     an option to its member countries to go for either                     governments buy or sell its currency to
     of the currency systems.                                               reduce day-to-day volatility of currency
          In the floating exchange rate system, a domestic                  fluctuations and sometimes go for
     currency is left free to float against a number of                     systematic intervention for desired
     foreign currencies in its foreign exchange market                      objectives. Canada and Japan fall in
     and determine its own value. Such exchange rates,                      this category, besides many developing
     are also called as market driven or based exchange                     countries. India too falls under this
     rates, which are regulated by factors such as the                      category which follows the dual currency
     demand and supply of the domestic and the                              regime since 1992–93 financial year.8
     foreign currencies in the concerned economy.                   (iii) Some economies, particularly small ones,
                                                                            peg their currencies to a major currency
        manageD exchange rates                                              or to a basket of currency in a fixed
                                                                            exchange rate—known as the pegging of
     A managed-exchange-rate system is a hybrid or
                                                                            currencies. At times, the peg is allowed to
     mixture of the fixed and flexible exchange rate
                                                                            glide smoothly upward or downward—a
     systems in which the government of the economy                         system which is known as gliding or
     attempts to affect the exchange rate directly by                       crawling peg. Some economies have a
     buying or selling foreign currencies or indirectly,                    hard fix of a currency board. A currency
     through monetary policy6 (i.e., by lowering or                         board is working well in Hong Kong
     raising interest rates on foreign currency bank                        while the same failed in Argentina in
     accounts, affecting foreign investment, etc.).                         2002.
          Today, most of the economies have shifted
     to this system of exchange rate determination.                 foreign exchange market
     Almost all countries tend to intervene when the
     markets become disorderly or the fundamentals               The market where different currencies can be
     of economics are challenged by the exchange rate            bought and sold is called the foreign exchange
     of the time. Some of the major examples of the              market.9 Out of the trades in different currencies,
     managed exchange-rate system have been given                the exchange rate of the currency is determined by
     below:7                                                     the economy.10 This is an institutional framework
           (i) Some countries allow to free float their          for the exchange of one national currency for
                 currencies and allow the market forces to       another.11 This is particularly correct either in the
                 determine their exchange rate with rare         case of a free float exchange (i.e., floating currency)
                 government intervention. This is the idea       regime or is a managed or hybrid exchange rate
                                                                    8.   Ministry of Finance, LERMS, Union Budget 1992–93,
        6.    Ibid., p. 615.
                                                                         (New Delhi: Government of India, 1992).
        7.    The discussion is based primarily on Samuelson and
                                                                    9.   Stiglitz and Walsh, Economics, p. 757.
              Nordhaus, Economics, 613–15 and D. Salvatore,
              International Economics (New Jersey: John Wiley      10.   Samuelson and Nordhaus, Economics, p. 604
              and Sons, 2004) pp. 717–22.                          11.   D. Salvatore, International Economics, p. 7.