Economics

EXCHANGE RATE AND ITS IMPACT ON INDIAN outside(prenominal) deal 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 pure way. The expanse , struggling to maintain its inborn end of growth, enfolding and price level , is almost helpless when it comes to achieving its objective of familiar equipoise if it has to intervene all the time in the forex marketplace to maintain the fixed trade evaluate. Given indias disposition 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 keen stir on notes supply, as high-powered money (H) fall by an equivalent amount (of the foreign bullion change in the market) and ordinary money in circulation lessen by the multiple of H. in other words , it acts care a re strictive monetary policy. In a country where diminution and low growth rate is a eonian problem, much(prenominal) a restrictive monetary policy is counter-productive. Faced with a continuous problem of shortage in the BOP , our planners ceremonious that the country has to go for an expenditure switching policy by way of high tariff barriers.

Hence under the locomote of fixed exchange rates with a continuous balance of trade deficit. There was not only a channel of wealth, but expenditure switching policies lead to a decrease in consumer surplus and a net loss in the economy . India also followed the st erilization policy as prescribed by the IMF! to nullify the effect of outflow of foreign exchange by way of increasing the reserve bank credit 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 pare economic policy of 1991, india went in for the flexible exchange rate and large convertibility in the...If you want to get a profuse essay, order it on our website: OrderCustomPaper.com

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