Objectives of Exchange Control

Objectives of Exchange Control

(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 in terms of foreign currencies. By overvaluing currency, the foreign exchange earnings of the country from exports are increased in cases where the demand is inelastic and the prices 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-term fluctuations are eliminated by deliberate action of authorities.

(iv) Elimination of Short-term Fluctuations in Exchange Rate. Exchange regulation in certain conditions is thought desirable to stabilize the exchange rat at what can be called the equilibrium level, i.e., the level determined by market forces. Short-term fluctuations are eliminated by deliberate action of authorities.

(v) Prevention of Export of Capital. When the country suffers from exceptionally heavy outflow of capital caused by loss of confidence on the part of nationals of the country or foreigners in the economy of the country or its currency, certain exchange controls over remittances from and the country are necessary.

(vi) Economic Planning. Exchange control is an important part of economic policy in any planned economy. Planning involves a very careful use of foreign exchange resources of the country so that only those goods are imported which are essential for the implementation of the plans. Exchange controls are resorted to regular the exports and imports in the light of plans.

(vii) Encouragement of Certain Economic Activities. One of the objectives of exchange regulations is to encourage certain economic activities in the country. Certain industries can be developed by reducing the imports of commodities produced by them and restricting the availability of foreign exchange to pay for them. For example tourist traffic in the country is encouraged by making available to the tourists home currency at favourable rates.

Different methods are adopted by Governments to ensure that suitable foreign exchange controls imposed and operated for the achievement of the desired objectives. Foreign exchange control was introduced in India in 1939 at the outbreak of World War II-as a measure under the Defence of India Rules. The primary objective of this control was to conserve foreign exchange resources of the country for obtaining necessary raw materials.

It was taken as a temporary device to meet the situation created by war. But since then the country has almost throughout faced the problem of foreign exchange deficit. The authorities, therefore, had to continue with the foreign exchange control. In the year 1947 the Foreign Exchange Regulation Act was passed which has been replaced by Foreign Exchange Regulation Act 1973. (FERA).

The exchange regulation and control has acquired a special meaning and significance in the context of planning of India. The imports of capital goods, components and raw materials for the developmental programmes of the country have necessitated large borrowings from other countries to finance them. The growing demand for imports and the servicing of foreign debt have made payment restrictions increasingly important. It is because of this that some system of exchange control to keep our external finance is sound condition is necessary. Control and regulation of old transactions involving foreign exchange, movements of capital from and to the country and exports and imports of currency, bullion, and precious stones have come to acquire a special importance in the economy of the country.

There is an elaborate machinery to effectively operate the exchange control and regulation in the country. The machinery comprises the authorities empowered to regulate foreign exchange transactions and to enforce the provisions of Foreign Exchange Regulation Act and to deal with any infringements of the provisions. The dealers authorized to deal in foreign exchange under the control system are also important parts of the machinery. Exchange control in India is administered by the Reserve Bank of India in accordance with the general policy laid down by the Union Government in consultation with the Reserve Bank. Authorized dealers are expected to purchase and sell foreign currencies in accordance with the Regulations.

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Objectives of Exchange Control

Objectives of Exchange Control (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 …

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