The Recent Exchange Rate Fluctuations

Abstract

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 speculation 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.