Explanation:
The term ‘currency war’ was used in recent times by Brazil’s finance minister Guido Mantega in the first week of October this year reacting to China’s attempt to protect the yuan from rising too quickly against the dollar.
It comprises competitive measures by governments to improve their trade by maneuvering exchange rates. A cheap currency,vis`-a-vis´ the dollar, adds to the competitive advantage to the exporter.
An attempt by the government to prevent its currency from appreciating too steeply and too fast against competing nation is what is seen as currency war between different countries.
What is its impact on Indian economy?
When competitors devalue their respective currencies, domestic exporters tend to lose out on the price advantage on their exportable as buyers prefer to buy from a cheaper currency.
The central bank at such times tries to intervene — buy dollars and create an artificial demand for the dollar, devaluing the value of the rupee in the process and retain some price advantage for the exporter.
But buying dollars involves a fiscal cost as the central bank has to pump in equivalent amount of rupees and again mop it up by selling bonds. These bonds need to be serviced by the government. This would in turn worsen the fiscal position.
Source: Economic Times
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