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Presentation ON: Exchange Rate
Presentation ON: Exchange Rate
EXCHANGE RATE
Exchange Rates
In finance, An Exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency
For Example, An Interbank exchange rate of 50.60 indian rupee to equal to 1 US$ (United Stated dollar) or that Rs. 50.60 will be exchanged for each 1(US$) At Present, US $ 1 = Rs.50.60 This rate is the conversion rate of every US $ 1 to Rs. 50.60
Advantages
A fixed exchange rate reduces exchange risk and the interruption, caused by sudden exchange rate movements By anchoring itself to a more reputable currency, the government can commit to following a sound monetary policy This in turn will ideally lead to lower interest rates
Problems
A fixed exchange rate will make the currency vulnerable to a speculative attack. A fixed exchange rate may encourage too much borrowing in foreign-currency debt For Example:- In East Asian crisis The rationing of foreign exchange rates which lead to inefficiency in the market and corruption
Benefits
The benefits of a flexible exchange rate is that it preserves the freedom of the central bank to conduct monetary policy In fact under flexible exchange rates monetary policy will be extra effective because of the effect of capital movements on the exchange rate For example. Suppose a government wants to stimulate the economy, it will lower the interest rates which will lead to a currency depreciation which will further increase to the demand & supply in market.
Problems
Exchange rate appreciation may lead to an uncompetitive manufacturing sector Flexible exchange rates may lead to increase in the transaction costs for international business
Indian policy
India is not fully open to capital flows While India does try to maintain an independent monetary policy, it is not the only tool in controlling inflation. Fiscal policy and direct controls are also important India has a managed to choose a hybrid policy which tries to avoid inflation
Conclusion
Both fixed and flexible exchange rates have their strengths and weaknesses. Governments have to choose the best exchange rate regime according to governments future goals & policies with keeping in mind the fundamentals of exchange rates.