What is Managed Floating Exchange Rate System?

Managed Floating Exchange Rate System is the combination of the fixed rate system (the managed part) and the flexible rate system (the floating part), thus, it is also called a Hybrid System. It refers to the system in which the foreign exchange rate is determined by the market forces and the central bank stabilizes the exchange rate in case of appreciation or depreciation of the domestic currency.

Geeky Takeaways:

  • Under this system, the central bank acts as a bulk buyer or seller of foreign exchange to control the fluctuation in the exchange rate. The central bank sells foreign exchange when the exchange rate is high to bring it down and vice versa. It is done for the protection of the interest of importers and exporters.
  • For this purpose, the central bank maintains the reserves of foreign exchange so that the exchange rate stays within a targeted value.
  • If a country manipulates the exchange rate by not following the rules and regulations, then it is known as Dirty Floating
  • However, the central bank follows the necessary rules and regulations to influence the exchange rate.

Example of Managed Floating Exchange Rate

Suppose, India has adopted Managed Floating System and the Reserve Bank of India (Central Bank) wants to keep the exchange rate $1 = ₹60. And, let’s assume that the Reserve Bank of India is ready to tolerate small fluctuations, like from 59.75 to 60.25; i.e., .25.
If the value remains within the above limit, then there is no intervention. But if due to excess demand for the Indian rupee the value of the rupee starts declining below 59.75/$. Then, in that case, RBI will start increasing the supply of rupees by selling the rupees for dollars and acquiring holding of dollars.
Similarly, due to the excess supply of the Indian rupee, if the value of the rupee starts increasing above 60.25/$. Then, in that case, RBI will start increasing the demand for Indian rupees by exchanging the dollars for rupees and running down its holding of dollars.
Hence, in this way, the Reserve Bank of India maintains the exchange rate.

Managed Floating Exchange Rate System : Meaning, Objectives, Merits and Demerits

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.

Table of Content

  • What is Managed Floating Exchange Rate System?
  • Objectives of Managed Floating Exchange Rate System
  • Advantages of Managed Floating Exchange Rate System
  • Disadvantages of Managed Floating Exchange Rate System

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What is Managed Floating Exchange Rate System?

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