31.Foreign Exchange Rate (Part 2) Flashcards
When was the rupee made partly convertible under the liberalized exchange rate management scheme?
The rupee was made partly convertible from March 1992.
What percentage of receipts on the current account could be freely converted into rupees at market determined exchange rate?
60% of receipts on the current account could be freely converted into rupees.
What was the surrender requirement for the remaining 40% of exchange receipts on the current account?
The remaining 40% of exchange receipts on the current account had to be surrendered to the RBI at the official fixed exchange rate.
What was the purpose of the 40% exchange receipts on the current account surrendered to the RBI?
The surrendered exchange receipts were meant for meeting government needs for foreign exchange and financing imports of essential commodities.
What was the significance of the partial convertibility of rupee on the current account?
It created a Dual Exchange Rate System, where both a fixed rate system and a market exchange rate system were followed simultaneously.
When did the Reserve Bank of India adopt the Market Exchange Rate System?
The Reserve Bank of India adopted the Market Exchange Rate System in 1993.
How is the exchange rate determined in the Market Exchange Rate System?
The exchange rate is determined by the demand and supply of foreign currency in the domestic economy.
What factors influence the demand for foreign currency in the domestic market?
Factors such as imports, tourism, and other transactions that require foreign currency influence the demand for foreign currency.
How does the demand curve for foreign currency in the Market Exchange Rate System behave?
The demand curve for foreign currency is downward sloping, meaning that the demand for foreign currency decreases as the exchange rate (price of foreign currency in terms of domestic currency) increases.
What factors contribute to the supply of foreign currency in the domestic market?
The supply of foreign currency comes from sources such as remittances from NRIs, foreign direct investment (FDI), foreign portfolio investment (FPI), deposits, and tourism.
How does the supply curve for foreign currency in the Market Exchange Rate System behave?
The supply curve for foreign currency is upward sloping, indicating that the supply of foreign currency increases as the exchange rate (price of foreign currency in terms of domestic currency) increases.
What determines the exchange rate in the Market Exchange Rate System?
The exchange rate is determined by the point of intersection between the demand and supply curves for foreign currency.
Can the exchange rate be predicted or determined optimally in the Market Exchange Rate System?
No, it is impossible to predict the exchange rate or determine an optimal market-determined exchange rate because the exchange rate movement depends on various demand and supply factors.
What happens when there is an increase in the supply of US dollars in the domestic market?
An increase in the supply of US dollars leads to excess supply over demand, causing the rupee to appreciate and the US dollar to depreciate.
How does the appreciation of the rupee and depreciation of the US dollar affect exports and imports?
The appreciation of the rupee and depreciation of the US dollar make exports more expensive and imports cheaper, resulting in a reduction in exports and an increase in imports.
