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.