According to Bhagawati (1991) the phrase “pass-through” was first used in economics literature by Steve Magee (1973) in his paper while explaining the impact of currency depreciation. Since then the concept has been widely used in the literature. In the case of international trade the suppliers of commodities deal with two currencies, the domestic currency against which commodities are procured, and the destination currency, the currencies of the importing country. Similarly, the importers of the commodities also face two currencies. With the breakdown of the Bretton Woods System in 1973, the international financial system opted largely for the flexible exchange rate system. Along with this world has witnessed an increasing degree of volatility. WhenContinue reading
Exchange Rate System
Floating Exchange Rate Systems Era
The Floating Rate Exchange Systems Era: 1973-onwards This period of floating rates experienced a relatively high volatility of the exchange rates. The US dollar surged ahead against all major currencies till 1984 and then the intervention of G-10 countries helped the sliding down of the dollar. The period also witnessed two quick shocks due to the excessive hike of the petroleum prices in 1973 and 1977 and that induced inflation in the world and changed the terms of trade of the petroleum importing countries. The major characteristics of this period can be put in order. The USA experienced a large current deficit, which touched $ 100 billion in 1990 with a very low saving-income ratio at theContinue reading
Progression / Transfer of FERA to FEMA
Foreign Exchange Regulation Act, 1973 (FERA) in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognized, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being. The scheme of FERA provided for obtaining Reserve Bank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by Reserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the Act came into force fromContinue reading
Various Forms of Exchange Control
Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by non-residents. The various forms that exchange control has taken are briefly discussed below: 1. Exchange Pegging This device is usually adopted during war in order to minimize exchange fluctuations. The internal value of a currency may depreciate due to inflation but the government may seek to keep its external value at a higher level than warranted by the purchasing power parity in order to facilitate international transactions. England during First World War and again in the Second World War adopted the method. Between 1916 and 1919, the Sterling was kept artificiallyContinue reading
Methods of Exchange Control
Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority. Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchangeContinue reading
Possible Courses of Exchange Control
Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority. Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchangeContinue reading