Economics

EXCHANGE RATE AND ITS IMPACT ON INDIAN outside(prenominal) shell out 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 severe way. The rural , struggling to maintain its inborn end of growth, meshing and price level , is almost helpless when it comes to achieving its objective of internal counterbalance if it has to intervene all the time in the forex market place to maintain the fixed commute send. Given indias written report 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 instantly stir on cash supply, as high-powered money (H) fall by an equivalent amount (of the foreign coin change in the market) and ordinary money in circulation abate by the multiple of H. in other words , it acts similar a restrictive monetary policy. In a country where mitigate and low growth rate is a never-failing problem, much(prenominal) a restrictive monetary policy is counter-productive. Faced with a continuous problem of shortage in the BOP , our planners found that the country has to go for an expenditure switching policy by way of high tariff barriers. Hence under the responsibility of fixed exchange rates with a continuous balance of trade shortage. There was not only a racetrack 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 positive by the IMF to nullify the effect of outflow of foreign exchange by way of increasing the reserve bank eyeshot 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 cutting econ omic policy of 1991, india went in for the f! lexible exchange rate and large convertibility in the...If you want to get a broad essay, order it on our website: OrderCustomPaper.com

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