Daily Current Affairs Quiz: December 10, 2025

Fixed Exchange Rate System — Recognized

• The currency’s value is fixed/pegged to another major currency (like the USD) or to a basket of currencies.
• The central bank intervenes continuously to maintain the fixed value.
• Example: The Saudi Riyal pegged to USD.

Floating Exchange Rate System — Recognized

• The currency’s value is determined entirely by market forces of demand and supply.
• Minimal or no central bank intervention.
• Example: The US Dollar, Euro, Japanese Yen.

Pegged Float System — Recognized

Also called managed float or crawling peg.

• The currency is mostly market-driven but the central bank intervenes occasionally to stabilize excessive volatility or maintain a target band.
• Example: Indian Rupee follows a managed float regime.

Hybrid System — Recognized

• Many countries adopt a hybrid approach combining features of both fixed and floating regimes.
• This may include a band system, dirty float, or partial pegs.

Import restrictions reduce imports directly, but they lead to an appreciation of the real exchange rate. A stronger domestic currency makes exports less competitive, reducing exports. Hence, the net effect is that net exports decrease, while the real exchange rate appreciates.

A soft currency is generally a currency from a developing country with a relatively unstable economy, which can experience high inflation, volatile exchange rates and limited convertibility. It faces restricted acceptability in international exchanges due to concerns about its stability and future value.

Statement 1 is correct: Devaluation increases the cost of imports as it reduces the value of the domestic currency relative to foreign currencies. This means more domestic currency is required to purchase the same amount of foreign goods.

Statement 2 is incorrect: Revaluation increases the value of the domestic currency relative to foreign currencies, which reduces the value of foreign reserves when expressed in domestic currency terms.

Statement 3 is incorrect: Devaluation does not always result in higher inflation. While it often leads to inflation due to increased import costs, the extent depends on factors such as the structure of the economy, domestic production capacity, and monetary policy measures.

Statement I is incorrect: While India does have a managed floating exchange rate system, it wasn’t adopted in 1975 immediately after the Bretton Woods system collapsed. India adopted a managed floating exchange rate system in 1993. The Bretton Woods system collapsed in 1971.

Statement II is correct: A managed float allows the central bank (RBI in India’s case) to buy or sell its currency in the forex market to influence its value. This helps control excessive fluctuations and maintain relative stability.