The Recent Exchange Rate Fluctuations

Published date01 February 2013
AuthorKumarjit Mandal
Date01 February 2013
Subject MatterArticles
The Recent Exchange
Rate Fluctuations
Kumarjit Mandal
The recent exchange rate fluctuations in India have been a matter of concern for
the policymakers and general public. The current exchange rate regime in India,
known as managed float, has evolved through a long process of searching for an
appropriate policy regime for India. Since exchange rates are relative prices of
two currencies it is generally affected by the relative productivity differential and
real wage rates in the long-run. However, the bubbles arising out of specula-
tion plays a major role in determining the exchange rates in the short-run. The
present scenario about the exchange rate fluctuations in India has been caused
to a large extent by the deteriorating current account balance and the adverse
expectations associated with it. However, the question of intervention by the
government in the exchange rate market should be decided on the basis of the
impact of such exchange rate fluctuations on the real effective exchange rate and
the possible effects on the employment situation in the country.
JEL: F31, F32
Exchange Rate, Current Account Adjustments, Asset pricing, Monetary arrangements.
The financial markets in India have been intrigued by the recent episodes of
exchange rate fluctuations, particularly during the fiscal year 2011–12. Though the
exchange rate fluctuations are not peculiar to India given the unpredictable volatile
nature of global markets the dynamics of fluctuations have been a matter of serious
concern for the policymakers and general public. The exchange rate fluctuations in
the ‘free float’ era have the potential of affecting both the financial and real sectors
along with serious distributional consequences for the participating agents in the
Foreign Trade Review
48(1) 137–142
©2013 Indian Institute of
Foreign Trade
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/001573251204800107
Kumarjit Mandal is Associate Professor of Economics, University of Calcutta, India.

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