#imported inflation

[finovohub]

Indian rupee hits record low: What it means for commodity prices and the economy

https://img.etimg.com/thumb/msid-125800055,width-1200,height-630,imgsize-42288,overlay-etmarkets/articleshow.jpg The Indian rupee plunged past the psychologically crucial ₹90 mark against the US dollar on Wednesday, its weakest level ever, making it the worst-performing currency in Asia. This sharp depreciation underscores mounting pressure from persistent foreign portfolio outflows, a record…

Indian rupee hits record low: What it means for commodity prices and the economy

[golbscimonoceym]

Singapore’s Exchange rate policy

Context of Singapore: Singapore is a small country with no natural resource. Thus it is dependent on imports for its exports and basic consumption needs like food and fuel. Singapore also has a small domestic population, so it has to rely on exports and external demand to achieve high economic growth. Given SG’s dependency on trade, SG has chosen to manage her exchange rate. 

In doing so, SG has relinquished control over her interest rates and domestic money supply due to her position as an international financial hub, which requires her to allow free capital mobility. i.e Singapore is unable to use monetary policy in times of need.

Singapore uses a managed float exchange rate in which her exchange rate is allowed to float between two undisclosed bands, which are meant to prevent speculative demand. The S$ is measured against a basket of currencies of the key trading partners and competitors of Singapore and each of them are accorded different weightage depending on the extent of trade dependence Singapore has with that country. The composition of that basket of foreign curries is reviewed and revised timely to reflect and keep up with changes in Singapore evolving trade patterns. The band in which the exchange rate is allowed to float is allowed to widen or narrow according to prevailing market conditions.

Main aim of the managed float is to fight imported inflation, instead of gaining export competitiveness. Singapore is a country which lacks natural resources and relies heavily on imported inputs for domestic consumption as well as export. By allowing her currency to appreciate slightly within the band, imported inputs are arguably cheaper, causing food, fuel and exports to be cheaper. This also helps Singapore’s households and firms to better cope with inflationary pressures.

MAS does not depreciate the S$ to boost export competitiveness because export competitiveness is likely to be eroded by relatively more expensive imported inputs with a depreciated currency.

Mas controls fluctuations in Singapore’s currency so as to maintain exchange rate and macroeconomic stability. Nevertheless, the S$ is still allowed to flow market conditions in the long run while being moderately undervalued so that the resulting BOP surpluses result in the accumulation of foreign currency reserves which are vital for when there is a need to adjust the exchange rate and finance imports in time of crisis. Also, the BOP surplus resulting from the slightly depreciated S$ is necessary to generate money supply growth in order to fuel Singapore’s long-run economic growth.