15.6 ndian onom
system. It is altogether not allowed either in a
fixed currency system or a hard fix (in a hard fix
this happens once the currency to which the hard The monetary difference of the total export and
fix has been done itself starts fluctuating). import of an economy in one financial year is called
trade balance. It might be positive or negative,
exchange rate in inDia known to be either favourable or unfavourable,
respectively to the economy.
Indian currency, the ‘rupee’, was historically
linked with the British Pound Sterling till 1948
which was fixed as far back as 1928. Once the
IMF came up, India shifted to the fixed currency Broadly speaking, the economic policy which
system committed to maintain rupee’s external regulates the export-import activities of any
value (i.e., exchange rate) in terms of gold or economy is known as the trade policy. It is also
the US ($ Dollar). In 1948, Rs. 3.30 was fixed called the foreign trade policy or the Exim Policy.
equivalent to US $ 1. This policy needs regular modifications depending
In September 1975, India delinked rupee upon the economic policies of the economies of
from the British Pound and the RBI started the world or the trading partners.13
determining rupee’s exchange rate with respect
to the exchange rate movements of the basket of DePreciation
world currencies (£, $, ¥, DM, Fr.). This was an
arrangement between the fixed and the floating This term is used to mean two different things.
currency regimes. In foreign exchange market, it is a situation when
domestic currency loses its value in front of a
In 1992–93 financial year, India moved to
foreign currency if it is market-driven. It means
the floating currency regime with its own method
depreciation in a currency can only take place if
which is known as the ‘dual exchange rate’.12
the economy follows the floating exchange rate
There are two exchange rates for rupee, one is the
‘official rate’ and the other is the ‘market rate’.
Here the point should be noted that it is the In domestic economy, depreciation means
everyday’s changing market-based exchange rate an asset losing its value due to either its use,
of rupee which affects the official exchange rate wear and tear or due to other economic reasons.
and not the other way round. But the RBI may Depreciation here means wear and tear. This is also
intervene in the forex market via the demand and known as capital consumption. Every economy
supply of rupee or the foreign currencies. Another has an official annual rates for different assets at
point which should be kept in mind is that none which fixed assets are considered depreciating.
of the economies have till date followed an ideal
free-floating exchange rate. They require some Devaluation
mechanism to intervene in the foreign exchange In the foreign exchange market when exchange
market because this is a highly speculative market. rate of a domestic currency is cut down by its
12. Ministry of Finance, LERMS. 13. D. Salvatore, International Economics, pp. 235–36.