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1 (a)A foreign currency exchange rate or simply exchange rate,is the price of one countrys
currency in units of another currency or commodity (typically gold or silver). If the government
of a country- for example, Argentina- regulates therate at which its currency- the peso- is
exchanged for other currencies, the system or regime is classified as a fixed or managed
exchange rate regime. The rate at which the currency is fixed, or pegged, is frequently referred to
as its par value. if the government does not interfere in the valuation of its currency in any way,
we classify the currency as floating or flexible.
Spot exchange rate is the quoted price for foreign exchange to be delivered at once, or in two
days for inter-bank transactions. For example, 114/$ is a quote for the exchange rate between
the Japanese yen and the U.S. dollar. We would need 114 yen to buy one U.S. dollar for
immediate delivery.
Forward rate is the quoted price for foreign exchange to be delivered at a specified date in
future. For example, assume the 90-day forward rate for the Japanese yen is quoted as 112/$.
No currency is exchanged today, but in 90 days it will take 112 yen to buy one U.S. dollar. This
can be guaranteed by a forward exchange contract.
Forward premium or discount is the percentage difference between the spot and forward
exchange rate. To calculate this, using quotes from the previous two examples, one formula is

Where S is the spot exchange rate, F is the forward rate, and n is the number of days until the
forward contract becomes due.
Devaluation of a currency refers to a drop in foreign exchange value of a currency that is pegged
to gold or to another currency. In other words, the par value is reduced. The opposite of
devaluation is revaluation. To calculate devaluation as a percentage, one formula is:

Percentage change = Beginning rate ending rate

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Ending rate
Weakening, deterioration, or depreciation of a currency refers to a drop in the foreign exchange
value of a floating currency. The opposite of weakening is strengthening or appreciating, which
refers to a gain in the exchange value of a floating currency.
Soft or weak describes a currency that is expected to devalue or depreciate relative to major
currencies. It also refers to currencies whose values are being artificially sustained by their
governments. A currency is considered hard or strong if it is expected to revalue or appreciate
relative to major trading currencies.
The next section presents a brief history of the international monetary system form the days of
the classical gold standard to the present time.
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(b)Indian Financial Sector: Structure, Trends and Turns

I. Introduction
The financial sector in the Indian economy has had a checkered history. The story of the post-
independent (i.e., post-1947) Indian financial sector can perhaps be portrayed in terms of three distinct
phasesthe first phase spanning over the 1950s and 1960s exhibited some elements of instability
associated with laissez faire but underdeveloped banking; the second phase covering the 1970s and 1980s
began the process of financial development across the country under government auspices but which was
accompanied by a degree of financial repression; and the third phase since the 1990s has been
characterized by gradual and calibrated financial deepening and liberalization. While the present paper is
devoted primarily to the period since the 1990s, we also provide a brief account of the earlier two phases.

II. Indian Financial Sector: 19501990From Laissez Faire to Government Control

The Reserve Bank of India (RBI) was founded in 1935 under the Reserve Bank of India Act to
regulate the issue of Bank Notes and keeping the reserves with a view to securing monetary stability in
India and generally to operate the credit and currency system of the country to its advantage. Apart from
being the central bank and monetary policy authority, the RBI is the regulator of all banking activity,
including non-banking financial companies, manager of statutory reserves, debt manager of the
government, and banker to the government.
At the time of independence in 1947, India had 97 scheduled private banks, 557 nonscheduled
(small) private banks organized as joint stock companies, and 395 cooperative banks.
Thus, at the time of Indias independence, the organized banking sector comprised three major types of
players, viz., the Imperial Bank of India, joint-stock banks (which included both joint stock English and
Indian banks) and the foreign owned exchange banks.

The decade of 1950s and 1960s was characterized by limited access to finance of the productive sector
and a large number of banking failures.
Such dissatisfaction led the government of left-leaning Prime Minister (and then Finance Minister) Mrs
Indira Gandhi to nationalize fourteen private sector banks on 20 July 1969; and later six more commercial
banks in 1980. Thus, by the early 1980's the Indian banking sector was substantially nationalized, and
exhibited classical symptoms of financial repression, viz., high pre-emption of banks' investible resources
(with associated effects of crowding out of credit to the private sector), subject to an intricate cobweb of
administered interest rates, and accompanied by quantitative ceilings on sectoral credit, as governed by
the Reserve Bank of India.
Besides the commercial banks, there were four other types of financial institutions in the Indian financial
sector: development finance institutions (DFIs), co-operative banks,regional rural banks and post-offices.
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ANS 3(a)