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FTP Notes

Exchange controls are restrictions placed by governments on the purchase or sale of foreign currencies. Common controls include banning foreign currencies or limiting the amount of domestic currency that can be exchanged. Exchange controls are used by countries to protect their currency and foreign exchange reserves from volatility. India employs exchange controls for objectives like protecting its balance of payments, reducing the burden of foreign debt, and raising domestic price levels under certain economic conditions. The International Monetary Fund only allows countries with transitional economies to use exchange controls.

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59 views

FTP Notes

Exchange controls are restrictions placed by governments on the purchase or sale of foreign currencies. Common controls include banning foreign currencies or limiting the amount of domestic currency that can be exchanged. Exchange controls are used by countries to protect their currency and foreign exchange reserves from volatility. India employs exchange controls for objectives like protecting its balance of payments, reducing the burden of foreign debt, and raising domestic price levels under certain economic conditions. The International Monetary Fund only allows countries with transitional economies to use exchange controls.

Uploaded by

larryhert_10
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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What Does Exchange Control Mean?

Types of controls that governments put in place to ban or restrict the amount of foreign
currency or local currency that is allowed to be traded or purchased. Common exchange
controls include banning the use of foreign currency and restricting the amount of
domestic currency that can be exchanged within the country.

EXCHANGE CONTROL IN INDIA


Regulation at government level of money-flows in and out of a country. Exchange
controls are usually maintained in the belief that they help to protect a country's
currency and its foreign-exchangeres erves. The controls may restrict investments by
residents overseas and non-residents' investments andparticipation in the local market.
Big international currency movements tend not to obey such controls. Sometimes
individuals
are limited in the amount of currency they may take abroad for holidays. The UK
abandoned exchange controls in 1979. In Australia, exchange controls which had
persisted in one form or another since 1939 were virtually abolished in December 1983
when the $A was floated.

Types of controls that governments put in place to ban or restrict the amount of foreign
currency or local currency that is allowed to be traded or purchased. Common exchange
controls include banning the use of foreign currency and restricting the amount of
domestic currency that can be exchanged within the country.
Typically, countries that employ exchange controls are those with weaker economies.
These controls allow countries a greater degree of economic stability by limiting the
amount of exchange rate volatility due to currency inflows/outflows.

The International Monetary Fund has a provision called article 14, which only allows
countries with transitional economies to employ foreign exchange controls.

Objectives of exchange control in India


(i) Protection of Balance of Payments. One of the important objectives of exchange
control is protection of balance of payments. When the balance of payments deficit of a
nation becomes large an chronic an its automatic correction is not possible, certain
active measures have to be adopted. In normal times the adverse balance of payments
caused value of country's currency to fall and helps in restoring equilibrium. But there
are
conditions under which a fall in the exchange value and currency has no effect on
imports and exports. Under such situations, measures are adopted to stabilize the
exchange value of currency at level higher than would b possible under free conditions.

(ii) Reducing Burden of Foreign Debt. The exchange value of a currency is


sometimes
fixed and maintained at higher level to lighten the burden of foreign debts contracted
interms of foreign currencies. By overvaluing currency, the foreign exchange earnings
ofthe country from exports are increased in cases where the demand is inelastic and
theprices in therms of the home currency to be paid for essential imports get reduced.

(iii) Raising the Level of Prices. Sometimes the currency is undervalued to help in
raising certain conditions in thought desirable to stabilize the exchange rate at what can
be called the equilibrium level, i.e., the level determined by market forces. Short-ter

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