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Monday, 30 July 2018

Managed Float or Dirty Float

Managed Float
Managed Float
What is Managed Floating?

According to flexible exchange rate system, foreign exchange rate is determined by free forces of demand and supply for foreign currency in international money market. Sometime exchange rate goes beyond of a country's desired limit. In this case Central Bank of such country starts to intervene market forces to keep exchange rate within limits. It is called Managed Floating or Dirty Floating.

How does Central Bank manage?

When value of foreign currency increases against home currency, it means home currency is depreciating and when it is beyond of limit , Central Bank starts to sell foreign currency from its official reserves in international money market. Doing so , supply increases and rate decreases. In case of currency appreciation beyond limits, Central Bank starts to purchase forien currency and situation of excess demand arises. Consequently foriegn exchange rate starts to increase.

Why more currency appreciation is not good for a country in certain situation?

Sometime due to more currency appreciation, exports become expensive. For example , if rupee appreciates beyond the desired limit, demand for Indian goods and services will start to decrease thereby resulting loss. Foriegn buyer shall move to other goods which would be relatively cheaper.

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