Fixed Exchange Rate

Fixed Exchange Rate – A fixed exchange rate system is a monetary framework in which a country pegs its currency to another major currency (like the US Dollar) or a significant commodity (such as gold). Under this system, the government or central bank maintains the currency’s value within a narrow band, ensuring stability in international trade and investment. Key Features: Provides predictability in foreign trade and cross-border transactions. The central bank intervenes in the currency market to maintain the fixed rate. Helps control inflation and stabilize the economy in countries with volatile markets. Advantages: Encourages foreign investment due to currency stability. Reduces exchange rate risk for importers and exporters. Promotes confidence in the national currency. Disadvantages: Limits a country’s monetary policy flexibility. Requires large foreign reserves to maintain the peg. Vulnerable to speculative attacks if the fixed rate is perceived as unsustainable.

Example: If the Indian Rupee were pegged to the US Dollar at ₹75 = $1, the Reserve Bank of India would buy or sell Rupees to maintain this rate, ensuring stable trade and investment relations with the US