What is Managed Floating Exchange Rate System?

It is a mixture of

Flexible or Floating Exchange Rate System

and

Fixed Exchange Rate System

In this system

Exchange Rate Fluctuates Daily on basis of changes in Demand and Supply

However

Exchange Rate Movements are moderated by Central Bank

Central Banks intervene if there is high fluctuation of foreign exchange by buying and selling foreign currency

This process is called dirty floating

What is Dirty Floating?

It is a system in which exchange rate is allowed to fluctuate by central bank

But Central Bank intervene to keep it within a range by buying or selling foreign currency

Example

In China, there is concept of Managed Floating

Chinese Currency Yuan fluctuates daily but it value is kept at lower level by Chinese Central Bank using Dirty floating

This is to ensure Exports from China are cheaper as compared to other countries

NCERT Questions

Question 8

Would the central bank need to intervene in a managed floating system?

Explain why.

Other Books

Question 1

In the following questions, select the correct answers:

 ____ refers to a system in which foreign exchange rate is determined by market forces and central bank

influences the exchange rate through intervention.

1. Flexible Exchange rate system
2. Managed Floating Rate system
3. Dirty floating
4. Fixed Exchange rate system

Oswaal Questions

Question 1

Identify which of the following statement is true?

1. The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign exchange reserves.
2. In the managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.
3. In the managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations.
4. In the fixed exchange rate system, market forces fix the exchange rate.

Question 2

Read the news report given below and answer the questions that follow with respect to the same:

The rupee depreciated by 6 paise to close at 73.02 (provisional) against the US dollar on Monday, tracking a rebound in the American currency overseas.

At the interbank Forex market, the domestic unit opened at Rs 72.89 against the US dollar and witnessed an intra-day high of Rs 72.84 and a low of Rs 73.15.

The local unit finally settled at Rs 73.02, registering a fall of 6 paise over its previous close, even as the domestic equity market settled with significant gains on Budget day.

On Friday, the rupee had closed at Rs 72.96 against the American currency.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.21 per cent to Rs 90.78.

On the domestic equity market front, the BSE Sensex ended 2,314.84 points or 5 per cent higher at 48,600.61, while the broader NSE Nifty advanced 646.60 points or 4.74 per cent to 14,281.20.

Foreign institutional investors were net sellers in the capital market as they offloaded shares worth Rs5,930.66 crore on Friday, according to exchange data.

Brent Crude Futures, the global oil benchmark, advanced 0.84 per cent to USD 55.50 per barrel. - "Rupee tumbles 6 paise to close at Rs 73.02 against US dollar" - The Economic Times - February 01, 2021

Question 1

How will the devaluation of Indian Rupee affect the imports?

1. Imports will fall.
2. Imports will rise.
3. Imports will have no effect.
4. None of the above

Question 2

How will the devaluation of Indian Rupee affect the exports?

1. Exports will fall.
2. Exports will rise.
3. Exports will remain same.
4. Exports will fall first and then rise.

Question 3

Read the following statements - Assertion (A) and Reason (R).

Assertion (A): Forex reserve of the country will fall.

Reason (R): Due to devaluation of domestic currency.

Select the correct alternative from the following:

1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
3. Assertion (A) is true, but Reason (R) is false.
4. Assertion (A) is false, but Reason (R) is true.

Question 4

How is the exchange rate determined in India?

1. By the government.
2. By the demand and supply of Foreign Currency
3. Both (A) and (B)
4. Neither (A) nor (B)