Why India Cannot Peg Currency?

Why India Cannot Peg Currency?

Why can't India peg its currency with a strong currency?

India, like many other developing nations, has a floating exchange rate for its currency, the Indian Rupee. This means that the value of the Rupee is determined by the forces of supply and demand on the foreign exchange market.

In contrast, a pegged exchange rate means that the value of a country's currency is fixed to that of another currency, usually a larger and more stable economy.
While pegging the Rupee to a strong currency like the US Dollar may seem like a good idea, it would in fact limit India's ability to conduct independent monetary policy. The Reserve
 Bank of India (RBI), the country's central bank, uses tools like interest rate adjustments to control inflation and stabilize the economy.
However, if the Rupee was pegged to the dollar, any changes in the value of the dollar would automatically be passed on to the domestic economy, leaving the RBI with limited options to control the economy.
Furthermore, a pegged exchange rate can also make a country's economy vulnerable to external economic shocks. For example, a change in global demand for India's exports, such as a decrease in the demand for IT services, would lead to a decrease in the value of the Rupee. This in turn would lead to a decrease in the country's GDP, as exports make a significant contribution to the Indian economy
In conclusion, while pegging the Rupee to a strong currency may seem like a good idea, it would in fact limit India's ability to conduct independent monetary policy and make the economy vulnerable to external economic shocks. Therefore, India chooses to have a floating exchange rate for its currency, the Indian Rupee.

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