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Kerala PSC Indian Economy Book Study Materials Page 420Book's First Page
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.