Unit IV: Exchange Rate & Its Economic Effects | Financial Management & Economics Finance: CA Intermediate (Old Scheme) PDF Download

 Page 1


4.83 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
LEARNING OUTCOMES
UNIT IV: EXCHANGE RATE AND ITS 
ECONOMIC EFFECTS 
At the end of this unit, you will be able to: 
? Define exchange rate and describe how it is determined  
? Appraise different types of exchange rate regimes  
? Describe the functioning of the foreign exchange market 
? Explain changes in exchange rates and their impact on the 
real economy 
 
 
 4.1 INTRODUCTION 
Each day we get fascinating news about currency which fuel our curiosity, such as 
Rupee gains 12 paise against US dollar, Dollar Spot/Forward Rates plummet, 
Rupee down, Euro holds steady, Pound strengthens etc. Ever wondered what 
UNIT OVERVIEW 
International 
Trade
Exchange Rate 
and its 
Economic 
Effects
The Exchange 
Rate Regimes
Changes in 
Exchange Rates
Devaluation Vs 
Depreciation
Page 2


4.83 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
LEARNING OUTCOMES
UNIT IV: EXCHANGE RATE AND ITS 
ECONOMIC EFFECTS 
At the end of this unit, you will be able to: 
? Define exchange rate and describe how it is determined  
? Appraise different types of exchange rate regimes  
? Describe the functioning of the foreign exchange market 
? Explain changes in exchange rates and their impact on the 
real economy 
 
 
 4.1 INTRODUCTION 
Each day we get fascinating news about currency which fuel our curiosity, such as 
Rupee gains 12 paise against US dollar, Dollar Spot/Forward Rates plummet, 
Rupee down, Euro holds steady, Pound strengthens etc. Ever wondered what 
UNIT OVERVIEW 
International 
Trade
Exchange Rate 
and its 
Economic 
Effects
The Exchange 
Rate Regimes
Changes in 
Exchange Rates
Devaluation Vs 
Depreciation
4.84 ECONOMICS FOR FINANCE 
these jargons mean? We shall try to understand a few fundamentals related to 
currency transactions in this unit. 
In chapter 3, we examined the demand for and supply of domestic currency.  It is 
not domestic currency alone that we need. Households, businesses and 
governments in India, for example, buy different types of goods and services 
produced in other countries. Similarly, residents of the rest of the world buy 
goods and services from residents in India. Foreign investors, businesses, and 
governments invest in our country, just as our nationals invest in other countries. 
In the same way, lending, and borrowing also take place internationally. These 
and similar other transactions give rise to an international dimension of 
money, which involves exchange of one currency for another. Obviously, this 
entails market transactions involving determination of price of one currency in 
terms of another.  
 4.2 THE EXCHANGE RATE 
The term ‘Foreign Exchange’ refers to money denominated in a currency other 
than the domestic currency. Similar to any other commodity, foreign exchange 
has a price. The exchange rate, also known as a foreign exchange (FX) rate, is the 
price of one currency expressed in terms of units of another currency and 
represents the number of units of one currency that exchanges for a unit of 
another. In other words, exchange rate is the rate at which the currency of one 
country is exchanged for the currency of another country. It is the minimum 
number of units of one country’s currency required to purchase one unit of the 
other country’s currency. It is important to note that the value of a currency is 
relative as it is always given in terms of another currency. 
There are two ways to express nominal exchange rate between two currencies 
(e.g. the US $ and Indian Rupee) namely direct quote and indirect quote. The 
direct form of quotation is also called European Currency Quotation whereas 
indirect form is known as American Currency Quotation. A direct quote is the 
number of units of a local currency exchangeable for one unit of a foreign 
currency. The price of 1 dollar may be quoted in terms of how much rupees it 
takes to buy one dollar. For example, `76/US$ means that an amount of ` 76 is 
needed to buy one US dollar or `76 will be received while selling one US dollar. 
An indirect quote is the number of units of a foreign currency exchangeable for 
one unit of local currency; for example: $ 0.0151 per rupee. A quotation in direct 
form can easily be converted into a quotation in indirect form and vice-versa. This 
is done by taking the reciprocal of the given rate. 
Page 3


4.83 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
LEARNING OUTCOMES
UNIT IV: EXCHANGE RATE AND ITS 
ECONOMIC EFFECTS 
At the end of this unit, you will be able to: 
? Define exchange rate and describe how it is determined  
? Appraise different types of exchange rate regimes  
? Describe the functioning of the foreign exchange market 
? Explain changes in exchange rates and their impact on the 
real economy 
 
 
 4.1 INTRODUCTION 
Each day we get fascinating news about currency which fuel our curiosity, such as 
Rupee gains 12 paise against US dollar, Dollar Spot/Forward Rates plummet, 
Rupee down, Euro holds steady, Pound strengthens etc. Ever wondered what 
UNIT OVERVIEW 
International 
Trade
Exchange Rate 
and its 
Economic 
Effects
The Exchange 
Rate Regimes
Changes in 
Exchange Rates
Devaluation Vs 
Depreciation
4.84 ECONOMICS FOR FINANCE 
these jargons mean? We shall try to understand a few fundamentals related to 
currency transactions in this unit. 
In chapter 3, we examined the demand for and supply of domestic currency.  It is 
not domestic currency alone that we need. Households, businesses and 
governments in India, for example, buy different types of goods and services 
produced in other countries. Similarly, residents of the rest of the world buy 
goods and services from residents in India. Foreign investors, businesses, and 
governments invest in our country, just as our nationals invest in other countries. 
In the same way, lending, and borrowing also take place internationally. These 
and similar other transactions give rise to an international dimension of 
money, which involves exchange of one currency for another. Obviously, this 
entails market transactions involving determination of price of one currency in 
terms of another.  
 4.2 THE EXCHANGE RATE 
The term ‘Foreign Exchange’ refers to money denominated in a currency other 
than the domestic currency. Similar to any other commodity, foreign exchange 
has a price. The exchange rate, also known as a foreign exchange (FX) rate, is the 
price of one currency expressed in terms of units of another currency and 
represents the number of units of one currency that exchanges for a unit of 
another. In other words, exchange rate is the rate at which the currency of one 
country is exchanged for the currency of another country. It is the minimum 
number of units of one country’s currency required to purchase one unit of the 
other country’s currency. It is important to note that the value of a currency is 
relative as it is always given in terms of another currency. 
There are two ways to express nominal exchange rate between two currencies 
(e.g. the US $ and Indian Rupee) namely direct quote and indirect quote. The 
direct form of quotation is also called European Currency Quotation whereas 
indirect form is known as American Currency Quotation. A direct quote is the 
number of units of a local currency exchangeable for one unit of a foreign 
currency. The price of 1 dollar may be quoted in terms of how much rupees it 
takes to buy one dollar. For example, `76/US$ means that an amount of ` 76 is 
needed to buy one US dollar or `76 will be received while selling one US dollar. 
An indirect quote is the number of units of a foreign currency exchangeable for 
one unit of local currency; for example: $ 0.0151 per rupee. A quotation in direct 
form can easily be converted into a quotation in indirect form and vice-versa. This 
is done by taking the reciprocal of the given rate. 
4.85 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
An exchange rate has two currency components; a ‘base currency’ and a ‘counter 
currency’. In a direct quotation, the foreign currency is the base currency and the 
domestic currency is the counter currency. In an indirect quotation, the domestic 
currency is the base currency and the foreign currency is the counter currency. As 
the US dollar is the dominant currency in global foreign exchange markets, the 
general convention is to apply direct quotes that have the US dollar as the base 
currency and other currencies as the counter currency.  
There may be two pairs of currencies with one currency being common between 
the two pairs. For instance, exchange rates may be given between a pair, X and Y 
and another pair, X and Z. The rate between Y and Z is derived from the given 
rates of the two pairs (X and Y, and, X and Z) and is called ‘cross rate’. When there 
is no difference between the buying and the selling rate, the rate is said to be 
‘unique’ or ‘unified’. But it is rarely seen in practice. There are generally two rates 
– selling rate and buying rate – for any currency when one goes to exchange it in 
the market. Selling rate is generally higher than the buying rate for a currency. 
This is the commission of the money exchanger (dealer) to run its operations. 
 4.3 THE EXCHANGE RATE REGIMES  
An exchange rate regime is the system by which a country manages its currency 
with respect to foreign currencies. It refers to the method by which the value of 
the domestic currency in terms of foreign currencies is determined. There are two 
major types of exchange rate regimes at the extreme ends; namely: 
(i) floating exchange rate regime (also called a flexible exchange rate), and  
(ii) fixed exchange rate regime  
Under floating exchange rate regime, the equilibrium value of the exchange rate 
of a country’s currency is market-determined i.e. the demand for and supply of 
currency relative to other currencies determine the exchange rate. There is no 
predetermined target rate and the exchange rates are likely to change at every 
moment in time depending on the changing demand for and supply of currency 
in the market. There is no interference on the part of the government or the 
central bank of the country in the determination of exchange rate. Any 
intervention by the central banks in the foreign exchange market (through 
purchases or sales of foreign currency in exchange for local currency) is intended 
for only moderating the rate of change and preventing undue fluctuations in the 
exchange rate, rather than for establishing a particular level for it (for example: 
India).Nevertheless, in a few countries (for example, New Zealand, Sweden, the 
Page 4


4.83 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
LEARNING OUTCOMES
UNIT IV: EXCHANGE RATE AND ITS 
ECONOMIC EFFECTS 
At the end of this unit, you will be able to: 
? Define exchange rate and describe how it is determined  
? Appraise different types of exchange rate regimes  
? Describe the functioning of the foreign exchange market 
? Explain changes in exchange rates and their impact on the 
real economy 
 
 
 4.1 INTRODUCTION 
Each day we get fascinating news about currency which fuel our curiosity, such as 
Rupee gains 12 paise against US dollar, Dollar Spot/Forward Rates plummet, 
Rupee down, Euro holds steady, Pound strengthens etc. Ever wondered what 
UNIT OVERVIEW 
International 
Trade
Exchange Rate 
and its 
Economic 
Effects
The Exchange 
Rate Regimes
Changes in 
Exchange Rates
Devaluation Vs 
Depreciation
4.84 ECONOMICS FOR FINANCE 
these jargons mean? We shall try to understand a few fundamentals related to 
currency transactions in this unit. 
In chapter 3, we examined the demand for and supply of domestic currency.  It is 
not domestic currency alone that we need. Households, businesses and 
governments in India, for example, buy different types of goods and services 
produced in other countries. Similarly, residents of the rest of the world buy 
goods and services from residents in India. Foreign investors, businesses, and 
governments invest in our country, just as our nationals invest in other countries. 
In the same way, lending, and borrowing also take place internationally. These 
and similar other transactions give rise to an international dimension of 
money, which involves exchange of one currency for another. Obviously, this 
entails market transactions involving determination of price of one currency in 
terms of another.  
 4.2 THE EXCHANGE RATE 
The term ‘Foreign Exchange’ refers to money denominated in a currency other 
than the domestic currency. Similar to any other commodity, foreign exchange 
has a price. The exchange rate, also known as a foreign exchange (FX) rate, is the 
price of one currency expressed in terms of units of another currency and 
represents the number of units of one currency that exchanges for a unit of 
another. In other words, exchange rate is the rate at which the currency of one 
country is exchanged for the currency of another country. It is the minimum 
number of units of one country’s currency required to purchase one unit of the 
other country’s currency. It is important to note that the value of a currency is 
relative as it is always given in terms of another currency. 
There are two ways to express nominal exchange rate between two currencies 
(e.g. the US $ and Indian Rupee) namely direct quote and indirect quote. The 
direct form of quotation is also called European Currency Quotation whereas 
indirect form is known as American Currency Quotation. A direct quote is the 
number of units of a local currency exchangeable for one unit of a foreign 
currency. The price of 1 dollar may be quoted in terms of how much rupees it 
takes to buy one dollar. For example, `76/US$ means that an amount of ` 76 is 
needed to buy one US dollar or `76 will be received while selling one US dollar. 
An indirect quote is the number of units of a foreign currency exchangeable for 
one unit of local currency; for example: $ 0.0151 per rupee. A quotation in direct 
form can easily be converted into a quotation in indirect form and vice-versa. This 
is done by taking the reciprocal of the given rate. 
4.85 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
An exchange rate has two currency components; a ‘base currency’ and a ‘counter 
currency’. In a direct quotation, the foreign currency is the base currency and the 
domestic currency is the counter currency. In an indirect quotation, the domestic 
currency is the base currency and the foreign currency is the counter currency. As 
the US dollar is the dominant currency in global foreign exchange markets, the 
general convention is to apply direct quotes that have the US dollar as the base 
currency and other currencies as the counter currency.  
There may be two pairs of currencies with one currency being common between 
the two pairs. For instance, exchange rates may be given between a pair, X and Y 
and another pair, X and Z. The rate between Y and Z is derived from the given 
rates of the two pairs (X and Y, and, X and Z) and is called ‘cross rate’. When there 
is no difference between the buying and the selling rate, the rate is said to be 
‘unique’ or ‘unified’. But it is rarely seen in practice. There are generally two rates 
– selling rate and buying rate – for any currency when one goes to exchange it in 
the market. Selling rate is generally higher than the buying rate for a currency. 
This is the commission of the money exchanger (dealer) to run its operations. 
 4.3 THE EXCHANGE RATE REGIMES  
An exchange rate regime is the system by which a country manages its currency 
with respect to foreign currencies. It refers to the method by which the value of 
the domestic currency in terms of foreign currencies is determined. There are two 
major types of exchange rate regimes at the extreme ends; namely: 
(i) floating exchange rate regime (also called a flexible exchange rate), and  
(ii) fixed exchange rate regime  
Under floating exchange rate regime, the equilibrium value of the exchange rate 
of a country’s currency is market-determined i.e. the demand for and supply of 
currency relative to other currencies determine the exchange rate. There is no 
predetermined target rate and the exchange rates are likely to change at every 
moment in time depending on the changing demand for and supply of currency 
in the market. There is no interference on the part of the government or the 
central bank of the country in the determination of exchange rate. Any 
intervention by the central banks in the foreign exchange market (through 
purchases or sales of foreign currency in exchange for local currency) is intended 
for only moderating the rate of change and preventing undue fluctuations in the 
exchange rate, rather than for establishing a particular level for it (for example: 
India).Nevertheless, in a few countries (for example, New Zealand, Sweden, the 
  
 
4.86 ECONOMICS FOR FINANCE 
United States), the central banks almost never interfere to administer the 
exchange rates. Nearly all advanced economies follow floating exchange rate 
regimes. Some large emerging market economies also follow the system.  
A fixed exchange rate, also referred to as pegged exchanged rate, is an exchange 
rate regime under which a country’s Central Bank and/ or government announces 
or decrees what its currency will be worth in terms of either another country’s 
currency or a basket of currencies or another measure of value, such as gold.  For 
example: a certain amount of rupees per dollar. (When a government intervenes 
in the foreign exchange market so that the exchange rate of its currency is 
different from what the market forces of demand and supply would have decided, 
it is said to have established a “peg” for its currency).  In order to sustain a fixed 
exchange rate, it is not enough that a country pronounces a fixed parity: it must 
also make concentrated efforts to defend that parity by being willing to buy (or 
sell) foreign reserves whenever the market demand for foreign currency is lesser 
(or greater) than the supply of foreign currency. In other words, in order to 
maintain the exchange rate at the predetermined level, the central bank 
intervenes in the foreign exchange market.  
We are often misled to think that it is common for countries to adopt the flexible 
exchange rate system. In the real world, there is a spectrum of ‘intermediate 
exchange rate regimes’ which are either inflexible or have varying degrees of 
flexibility that lie in between these two extremes (fixed and flexible).For example, 
a central bank can implement soft peg and hard peg policies. A soft peg refers to 
an exchange rate policy under which the exchange rate is generally determined 
by the market, but in case the exchange rate tends to be move speedily in one 
direction, the central bank will intervene in the market.  With a hard peg exchange 
rate policy, the central bank sets a fixed and unchanging value for the exchange 
rate. Both soft peg and hard peg policy require that the central bank intervenes in 
the foreign exchange market. The tables 4.4.1 and 4.4.2 show respectively, the 
IMF classifications and definitions of prevalent exchange rate systems and the 
latest available data (as on April 30, 2018) on the distribution of the 189 IMF 
members based on their exchange rate regimes. 
Table No:  4.4.1 
IMF Classifications and Definitions of Exchange Rate Regimes 
Exchange Rate Regimes Description 
Exchange arrangements with no Currency of another country 
circulates as sole legal tender or 
Page 5


4.83 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
LEARNING OUTCOMES
UNIT IV: EXCHANGE RATE AND ITS 
ECONOMIC EFFECTS 
At the end of this unit, you will be able to: 
? Define exchange rate and describe how it is determined  
? Appraise different types of exchange rate regimes  
? Describe the functioning of the foreign exchange market 
? Explain changes in exchange rates and their impact on the 
real economy 
 
 
 4.1 INTRODUCTION 
Each day we get fascinating news about currency which fuel our curiosity, such as 
Rupee gains 12 paise against US dollar, Dollar Spot/Forward Rates plummet, 
Rupee down, Euro holds steady, Pound strengthens etc. Ever wondered what 
UNIT OVERVIEW 
International 
Trade
Exchange Rate 
and its 
Economic 
Effects
The Exchange 
Rate Regimes
Changes in 
Exchange Rates
Devaluation Vs 
Depreciation
4.84 ECONOMICS FOR FINANCE 
these jargons mean? We shall try to understand a few fundamentals related to 
currency transactions in this unit. 
In chapter 3, we examined the demand for and supply of domestic currency.  It is 
not domestic currency alone that we need. Households, businesses and 
governments in India, for example, buy different types of goods and services 
produced in other countries. Similarly, residents of the rest of the world buy 
goods and services from residents in India. Foreign investors, businesses, and 
governments invest in our country, just as our nationals invest in other countries. 
In the same way, lending, and borrowing also take place internationally. These 
and similar other transactions give rise to an international dimension of 
money, which involves exchange of one currency for another. Obviously, this 
entails market transactions involving determination of price of one currency in 
terms of another.  
 4.2 THE EXCHANGE RATE 
The term ‘Foreign Exchange’ refers to money denominated in a currency other 
than the domestic currency. Similar to any other commodity, foreign exchange 
has a price. The exchange rate, also known as a foreign exchange (FX) rate, is the 
price of one currency expressed in terms of units of another currency and 
represents the number of units of one currency that exchanges for a unit of 
another. In other words, exchange rate is the rate at which the currency of one 
country is exchanged for the currency of another country. It is the minimum 
number of units of one country’s currency required to purchase one unit of the 
other country’s currency. It is important to note that the value of a currency is 
relative as it is always given in terms of another currency. 
There are two ways to express nominal exchange rate between two currencies 
(e.g. the US $ and Indian Rupee) namely direct quote and indirect quote. The 
direct form of quotation is also called European Currency Quotation whereas 
indirect form is known as American Currency Quotation. A direct quote is the 
number of units of a local currency exchangeable for one unit of a foreign 
currency. The price of 1 dollar may be quoted in terms of how much rupees it 
takes to buy one dollar. For example, `76/US$ means that an amount of ` 76 is 
needed to buy one US dollar or `76 will be received while selling one US dollar. 
An indirect quote is the number of units of a foreign currency exchangeable for 
one unit of local currency; for example: $ 0.0151 per rupee. A quotation in direct 
form can easily be converted into a quotation in indirect form and vice-versa. This 
is done by taking the reciprocal of the given rate. 
4.85 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
An exchange rate has two currency components; a ‘base currency’ and a ‘counter 
currency’. In a direct quotation, the foreign currency is the base currency and the 
domestic currency is the counter currency. In an indirect quotation, the domestic 
currency is the base currency and the foreign currency is the counter currency. As 
the US dollar is the dominant currency in global foreign exchange markets, the 
general convention is to apply direct quotes that have the US dollar as the base 
currency and other currencies as the counter currency.  
There may be two pairs of currencies with one currency being common between 
the two pairs. For instance, exchange rates may be given between a pair, X and Y 
and another pair, X and Z. The rate between Y and Z is derived from the given 
rates of the two pairs (X and Y, and, X and Z) and is called ‘cross rate’. When there 
is no difference between the buying and the selling rate, the rate is said to be 
‘unique’ or ‘unified’. But it is rarely seen in practice. There are generally two rates 
– selling rate and buying rate – for any currency when one goes to exchange it in 
the market. Selling rate is generally higher than the buying rate for a currency. 
This is the commission of the money exchanger (dealer) to run its operations. 
 4.3 THE EXCHANGE RATE REGIMES  
An exchange rate regime is the system by which a country manages its currency 
with respect to foreign currencies. It refers to the method by which the value of 
the domestic currency in terms of foreign currencies is determined. There are two 
major types of exchange rate regimes at the extreme ends; namely: 
(i) floating exchange rate regime (also called a flexible exchange rate), and  
(ii) fixed exchange rate regime  
Under floating exchange rate regime, the equilibrium value of the exchange rate 
of a country’s currency is market-determined i.e. the demand for and supply of 
currency relative to other currencies determine the exchange rate. There is no 
predetermined target rate and the exchange rates are likely to change at every 
moment in time depending on the changing demand for and supply of currency 
in the market. There is no interference on the part of the government or the 
central bank of the country in the determination of exchange rate. Any 
intervention by the central banks in the foreign exchange market (through 
purchases or sales of foreign currency in exchange for local currency) is intended 
for only moderating the rate of change and preventing undue fluctuations in the 
exchange rate, rather than for establishing a particular level for it (for example: 
India).Nevertheless, in a few countries (for example, New Zealand, Sweden, the 
  
 
4.86 ECONOMICS FOR FINANCE 
United States), the central banks almost never interfere to administer the 
exchange rates. Nearly all advanced economies follow floating exchange rate 
regimes. Some large emerging market economies also follow the system.  
A fixed exchange rate, also referred to as pegged exchanged rate, is an exchange 
rate regime under which a country’s Central Bank and/ or government announces 
or decrees what its currency will be worth in terms of either another country’s 
currency or a basket of currencies or another measure of value, such as gold.  For 
example: a certain amount of rupees per dollar. (When a government intervenes 
in the foreign exchange market so that the exchange rate of its currency is 
different from what the market forces of demand and supply would have decided, 
it is said to have established a “peg” for its currency).  In order to sustain a fixed 
exchange rate, it is not enough that a country pronounces a fixed parity: it must 
also make concentrated efforts to defend that parity by being willing to buy (or 
sell) foreign reserves whenever the market demand for foreign currency is lesser 
(or greater) than the supply of foreign currency. In other words, in order to 
maintain the exchange rate at the predetermined level, the central bank 
intervenes in the foreign exchange market.  
We are often misled to think that it is common for countries to adopt the flexible 
exchange rate system. In the real world, there is a spectrum of ‘intermediate 
exchange rate regimes’ which are either inflexible or have varying degrees of 
flexibility that lie in between these two extremes (fixed and flexible).For example, 
a central bank can implement soft peg and hard peg policies. A soft peg refers to 
an exchange rate policy under which the exchange rate is generally determined 
by the market, but in case the exchange rate tends to be move speedily in one 
direction, the central bank will intervene in the market.  With a hard peg exchange 
rate policy, the central bank sets a fixed and unchanging value for the exchange 
rate. Both soft peg and hard peg policy require that the central bank intervenes in 
the foreign exchange market. The tables 4.4.1 and 4.4.2 show respectively, the 
IMF classifications and definitions of prevalent exchange rate systems and the 
latest available data (as on April 30, 2018) on the distribution of the 189 IMF 
members based on their exchange rate regimes. 
Table No:  4.4.1 
IMF Classifications and Definitions of Exchange Rate Regimes 
Exchange Rate Regimes Description 
Exchange arrangements with no Currency of another country 
circulates as sole legal tender or 
 
 
4.87 
 
EXCHANGE RATE AND ITS ECONOMIC EFFECTS 
separate legal tender (13 countries) 
E.g. Kosovo –Euro  
Ecuador, El Salvador - US Dollar  
member belongs to a monetary or 
currency union in which same legal 
tender is shared by members of the 
union. 
Currency Board Arrangements 
(11 Countries) 
Hong Kong, Dominica, Grenada etc.-
Dollar 
Bosnia and Herzegovina, Bulgaria-Euro  
Monetary regime based on implicit 
national commitment to exchange 
domestic currency for a specified 
foreign currency at a fixed exchange 
rate. 
Other conventional fixed peg 
arrangement (43 Countries) 
E.g. Oman, Qatar, Saudi Arabia, United 
Arab 
Emirates etc. to -US Dollar 
Mali, Niger, Senegal, Cameroon etc. -
Euro  
Country pegs its currency (formal or 
de facto) at a fixed rate to a major 
currency or a basket of currencies 
where exchange rate fluctuates within 
a narrow margin or at most ± 1% 
around central rate. 
Pegged exchange rates within 
horizontal bands (1Country) Tonga 
Value of the currency is maintained 
within margins of fluctuation around 
a formal or de facto fixed peg that are 
wider than ± 1% around central rate. 
Crawling Peg (3 countries)  
Honduras, Nicaragua, Botswana 
Currency is adjusted periodically in 
small amounts at a fixed, 
preannounced rate in response to 
changes in certain quantitative 
indicators. 
Crawl –like arrangement (15 Countries) 
E.g. Iran, Afghanistan, Costa Rica 
Currency is maintained within certain 
fluctuation margins say (±1-2%)  
around a central rate that is adjusted 
periodically 
Other Managed Arrangement (13 
countries)  
E.g. Cambodia, Liberia, Zimbabwe 
 
Floating (35 Countries)  
E.g.India, Philippines, New Zealand, 
Malaysia  
Monetary authority influences the 
movements of the exchange rate 
through intervention in foreign