Economics

EXCHANGE RATE AND ITS IMPACT ON INDIAN outside(prenominal) TRADE

Following the over-valued, fixed flip set policy of 1 US $ = rs 35-36, india has learnt the lesson of perpetual intervention in the BOP problem, the concentrated way. The country , struggling to maintain its inborn end of growth, involution and price level , is almost helpless when it comes to achieving its objective of internal balance if it has to intervene all the time in the forex marketplace to maintain the fixed exchange rate. Given indias reputation of export (low demand elasticity in the international market) and here and now (inelastic in nature), intervention in the forex market amounted to a continuous selling of dollar (or forex) in the market.
This has a straight stir on money supply, as high-powered money (H) fall by an equivalent amount (of the foreign currency change in the market) and ordinary money in circulation ebb by the multiple of H. in other words , it acts like a restrictive monetary policy. In a country where decrease and low growth rate is a perennial problem, much(prenominal) a restrictive monetary policy is counter-productive.
Faced with a continuous problem of shortage in the BOP , our planners established that the country has to go for an expenditure switching policy by way of high tariff barriers.



Hence under the function of fixed exchange rates with a continuous balance of trade deficit. There was not only a course of wealth, but expenditure switching policies lead to a decrease in consumer surplus and a net loss in the economy .
India also followed the sterilization policy as official by the IMF to nullify the effect of outflow of foreign exchange by way of increasing the reserve bank opinion to various sectors, especially to the govt, continuous credit to the central govt, which amounts to deficit financing has a severe drawback- that of being inflationary.
With the advent of the peeled economic policy of 1991, india went in for the flexible exchange rate and large convertibility in the...If you want to get a full essay, order it on our website: Orderessay



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