Question

How does RBI maintain a fixed rate in a Fixed Exchange Rate System?

Options

• RBI fixes the value of currency in terms of gold only

• RBI buys/sells foreign exchange to maintain the fixed rate

• RBI makes no regular intervention

• RBI raises national income

Answer 1

RBI intervenes by buying or selling foreign exchange to maintain the fixed rate. This intervention distinguishes the Fixed Exchange Rate System from the Flexible system.