Fixed Exchange Rate and Floating Exchange Rate

Exchange Rate systems are classified traditionally into 2 categories, namely: systems with a fixed exchange rate and systems with a flexible exchange rate. In the former system the exchange rate is usually a political decision, in the latter the prices are determined by the market forces, in accordance with demand and supply. These systems are often referred to as Fixed or hard Peg and Floating systems. But as usual, between these two extreme positions there exists also an intermediate range of different systems with limited flexibility, usually referred to as “soft pegs”.
Fixed Exchange Rate
Here a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP.

Floating Exchange Rate
Here supply and demand sets the exchange rate. For example, if more people want to buy euros, and sell dollars to do so, the value of the euro rises in response, while the value of the dollar — relative to the Euro falls in forex trading.

About Indian Rupee
India has so far followed a calibrated approach towards capital account liberalisation. India, at present, does not permit the rupee to be officially used for international transactions, except those with Nepal and Bhutan, though there are indications of the Indian rupee gaining acceptability in other countries. Internationalisation of rupee would also require India to make the rupee fully convertible. This means that rupee could be exchanged against other currencies freely.
1. Indian Rupee is accepted as legal tender in the neighbouring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee.
2. The rupee was linked to the British pound from 1927–1946 and then the U.S. dollar till 1975 through a fixed exchange rate.
3. It was devalued in September 1975 and the system of fixed par rate was replaced with a basket of four major international currencies – the British pound, the U.S. dollar, the Japanese yen and the Deutsche mark.

4. In July 1991 the Indian government devalued the rupee by between 18 and 19 percent due to its high trade deficit and current account deficit.
5. From 1993 onward, India has followed a managed floating exchange rate system. Under the current managed floating system, the exchange rate is determined ostensibly by market forces, but the Reserve Bank of India plays a significant role in determining the exchange rate by selecting a target rate and buying and selling foreign currency in order to meet the target.  Initially, the rupee was valued at 31.37 to one US dollar but the RBI has since allowed the rupee to depreciate against the dollar.
6. In 2009, a rising rupee prompted the Government of India to purchase 200 tons of gold for $6.7 billion from the IMF.

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