The Relationship between Interest estimate and Exchange roll in India Pradyumna Dash Introduction The theoretical as swell up as empirical relationship between the following esteem and interchange rate has been a debatable issue among the economists. accord to Mundell-Fleming model, an development in intimacy rate is necessary to stabilise the give-and-take rate depreciation and to curb the inflationary ram and thereby helps to avoid many adverse economic consequences. The soaring relate rate policy is considered important for several reasons. Firstly, it provides the instruction to the market place about the authorities resolve not to book the cunning switch over rate movement that the market expects given the solid ground of the economy and thereby cut down the inflationary expectations and prevent the heavy-handed cycle of inflation and change over rate depreciation. Secondly, it raises the attractiveness of house servant financial assets as a res ult of which capital influx takes place and thereby limiting the exchange rate depreciation. Thirdly, it not only reduces the take aim of national aggregate demand notwithstanding also improves the quietus of payment position by reduce the level of imports.
only when the East Asian currency crisis and the mishap of high fire rates policy to stabilize the exchange rate at its desirable level during 1997-1998 have challenged the believability of raising interest rates to defend the exchange rate. Critics vie that the high interest rates imperil the ability of the domestic firms and banks to pay patronize the external debt and thereby reduce the hazard! of repayment. As a result, high interest rates continue to capital outflows and thereby depreciation of the currency. The exchange rate regime in our area has undergone a significant change during 1990s. Until February 1992, exchange rate in India was fixed by the Reserve aver of India. Thereafter a dual exchange rate arranging was adopted during abut 1992 to Figure1: February 1993 which also came to an end and...If you want to progress to a panoptic essay, order it on our website: OrderCustomPaper.com
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