Economics

EXCHANGE RATE AND ITS IMPACT ON INDIAN outside(prenominal) peck 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, affair and price level , is almost helpless when it comes to achieving its objective of intrinsic chemical equilibrium if it has to intervene all the time in the forex grocery store to maintain the fixed change place. Given indias personality of export (low demand elasticity in the international market) and present 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 unfeigned stir on capital supply, as high-powered money (H) fall by an equivalent amount (of the foreign cash change in the market) and ordinary money in circulation decline by the multiple of H. in other words , it acts same(p) a restrictive monetary policy. In a country where lessening and low growth rate is a imperishable problem, much(prenominal) a restrictive monetary policy is counter-productive. Faced with a continuous problem of shortage in the BOP , our planners realised that the country has to go for an expenditure switching policy by way of high tariff barriers.

Hence under the work on of fixed exchange rates with a continuous balance of trade famine. There was not only a seam of wealth, but expenditure switching policies lead to a decrease in consumer surplus and a net loss in the economy . India al so followed the sterilization policy as aut! horised by the IMF to nullify the effect of outflow of foreign exchange by way of increasing the reserve bank assessment 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 tender economic policy of 1991, india went in for the flexible exchange rate and large convertibility in the...If you want to get a overflowing essay, order it on our website: OrderCustomPaper.com

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