EXCHANGE RATE REGIME, FIXED EXCHANGE RATE /PEGGED FLOAT, FLOATING / FLEXIBLE EXCHANGE RATE, MANAGED EXCHANGE RATE, EXCHANGE RATE SYSTEM IN INDIA

EXCHANGE RATE REGIME: 

• An Exchange-Rate Regime is the manner in which an authority manages the Exchange Rate of its domestic currency in relation to other currencies in the foreign exchange market.
• Exchange-Rate Regime is closely related to Monetary Policy and both affects each other.

There are three main types of Exchange rate regimes:

●        Floating / Flexible Exchange Rate

●        Fixed Exchange Rate

●        Managed Exchange Rate 

FIXED EXCHANGE RATE /PEGGED FLOAT:

In Fixed Exchange Rate regime:

• Currency's value remains fix 
• Currency does not respond to Foreign-Exchange market fluctuations.
• The regime helps control inflation, and a stable environment for facilitating international trade. 
• Qatar is following Fixed Exchange Rate regime where 1 USD=3.64 Qatari Rial.

FLOATING / FLEXIBLE EXCHANGE RATE:

In Floating Exchange Rate regime:

• Currency's value fluctuates in response to Foreign-Exchange market mechanisms
• Market Mechanisms include speculation and supply and demand forces in the market.
• Currency is known as floating currency. 

Most of the countries have adopted Floating exchange rates after the failure of the Gold Standard and the Bretton Woods agreement.

MANAGED EXCHANGE RATE:

• Halfway between Floating Exchange Rate regime and Fixed Exchange Rate regime system.

In normal times, Currency's value fluctuates in response to Foreign-Exchange market mechanisms

                                                                 but 

The government or the country’s central bank may occasionally intervene to direct the country’s currency value into a certain direction. 

DIRTY FLOAT EXCHANGE RATE:

• When a country / the central bank manipulates the exchange rate without following rules and regulations.

EXCHANGE RATE SYSTEM IN INDIA:

Since independence------------Fixed Exchange Rate in the form of sterling parity & world currencies.

                                ⇓

Post independence “Fixed and Adjustable” regime. Exchange Rate $1=Rs 1 (1947)

                     ⇓

Economic crises associated with Balance of Payment crisis since independence led to devaluation of INR to 1 $ =31 Rs by 1993.

                     ⇓

                              Post 1993, Floating Exchange Rate Regime