Objectives of Managed Floating Exchange Rate System

Managed Floating Exchange Rate System fulfills the objectives that are important for the smooth running of markets. Some of the objectives fulfilled by managed floating exchange rate system are:

1. Lower down the Volatility: Managed Floating Exchange Rate System helps in controlling the volatility which is caused due to market forces. Volatility in the exchange rate should not be left untreated because it can cause an increase in prices even for essential commodities.
2. Ensures Sufficient Foreign Exchange: Managed Floating Exchange Rate System ensures that the country has sufficient foreign exchange which can be sold at the time of crisis.
3. Prevents Speculations: Managed Floating Exchange Rate System ensures that there is a restriction against rapid and increasing speculations that are caused due to buying and selling of foreign exchange in order to earn profits.
4. Ensures Adequate BOP: Managed Floating Exchange Rate System ensures that the country is maintaining an adequate and fair balance of payment accounts.

A medium of exchange for goods and services is called currency, which is different from one country to another country. However, a country’s currency cannot be used in another country. For this purpose, the currency of one country is converted into the currency of another country, and the rate at which one currency is exchanged for another is called the Foreign Exchange Rate. Foreign exchange rates can be classified into various types. One of them is Managed Floating Exchange Rate System. Managed Floating Exchange Rate System is determined both by the market forces and the Central Bank.