15.6         ndian      onom
     system. It is altogether not allowed either in a
     fixed currency system or a hard fix (in a hard fix
                                                            traDe balance
     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
                                                            traDe Policy
     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
                                                         system.
     ‘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.