Consider the following statements in context to Exchange Rate Regime in India:In India, there are two exchange rate of rupee, one is official rate and the other is market rate.RBI may intervene in the forex market via the demand and supply of rupee.Which of the statements given above is/are correct?
Question
Consider the following statements in context to Exchange Rate Regime in India:In India, there are two exchange rate of rupee, one is official rate and the other is market rate.RBI may intervene in the forex market via the demand and supply of rupee.Which of the statements given above is/are correct?
Solution 1
The second statement is correct. The Reserve Bank of India (RBI) may intervene in the forex market via the demand and supply of rupee. This is done to stabilize the exchange rate and prevent excessive volatility.
However, the first statement is incorrect. India does not have two exchange rates for the rupee. India follows a managed floating exchange rate system, also known as a dirty float. In this system, the exchange rate is determined by the forex market, i.e., demand and supply of foreign exchange. But the RBI intervenes in the forex market to prevent excessive volatility in the exchange rate.
Solution 2
The second statement is correct. The Reserve Bank of India (RBI) may intervene in the forex market via the demand and supply of rupee. This is done to stabilize the exchange rate and prevent excessive volatility in the forex market.
However, the first statement is incorrect. India follows a unified exchange rate system, meaning there is only one exchange rate for the rupee which is determined by the market. The market rate is the rate at which the currency trades in the foreign exchange market. There is no separate official rate. This has been the case since 1993 when India moved to a market-determined exchange rate system. Prior to this, India did have a dual exchange rate system.
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