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Exchange Rate System.pptx
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- 2. TYPES OF EXCHANGERATE SYSTEM • I.Fixed Exchange Rate System – exchange rate is determined by the Central Bank of the country • Devaluation – fall in the value of a currency by official action • Revaluation – rise in the value of a currency by official action • Egs – Gold Standard , Bretton Woods System
- 3. • II. FlexibleExchange Rate System – exchange rate or the value of a currency is determined by market forces of demand and supply of foreign exchange. • Appreciation – rise in the value of a currency in terms of a foreign currency under flexible exchange rates • Depreciation – fall in the value of a currency in terms of a foreign currency under flexible exchange rates
- 4. • III ManagedFloat Exchange Rate System – though exchange rate is determined by market forces of demand and supply, central banks intervene in foreign exchange markets to influence the exchange rates and to keep fluctuations within reasonable limit • Fluctuations in exchange rate effect the real sector (exports, imports) hence, balance of payment • Intervention in forex markets effects money supply and price stability • Central banks Sterilise this intervention by selling government securities to banks. Eg Market Stabilization Scheme (2004) in India • Provides stability to foreign trade, capital flows and balance of payments • However, central banks need adequate reserves of foreign exchange
- 5. DETERMINATION OF EXCHANGERATE BETWEEN $ AND ₹ • Demand for $ - from importers, Indians travelling abroad, for direct and portfolio investments abroad Diagram • Supply of $ - from exporters, foreign travellers, FDIs and FPIs Diagram
- 6. FACTORS AFFECTING EXCHANGERATE DETERMINATION
- 7. 1.INFLATION Domestic products becomerelatively more expensive Reduces export, encourages imports
- 8. 2. INTEREST RATES Risein interest rates on bonds, securities attracts foreign capital looking for high returns
- 9. 3. CAPITAL INFLOWS Higherreturns, favourable government policies for attracting FDIs like structural reforms, reduction in taxes, disinvestment, improvement in the ease of doing business etc
- 10. 4. CAPITAL OUTFLOWS Political instability,higher returns on assets in other economies, lower returns on investments
- 11. OTHER DETERMINANTS • Exportpromotion measures like export subsidies, tax concessions, increased demand for exports, remittances- increases supply of foreign exchange causing currency appreciation • International factors like US sanctions on Iran increasing oil prices, current account deficits, increased demand for gold in India – increases demand for foreign exchange causing currency depreciation