Finance, Forex and Investments

When and why do countries change from Fixed Currency exchange rate to Freely trading one.?

Please read my question in the following context. USD to Indian Rs (INR) exchange rate is approx 1:44 however as per the PPP (Purchasing Power Parity) the real rate is 1:10. This is controleed by Indian govt. However they are working on a 5 year plan to make the Indian currency fully convertible. Does that mean the exchange rate would move towards the real raito ? It might be useful to keep in ming the high projected economy growth rate and the opening up of economy by Indian government. India is opening up its retail and other service industries, which the big investors are eagerly waiting for a long time. Retail alone is expected to be bigger than IT. NYSE has already bought 5% stake in Indian National Stock Exchange and 60 billion dollars is waiting to enter the Indian financial market (mutual funds). Befor ending my this posting, I would really like to thank you for all your time and help to answer my question.

Public Comments

1. In reality there are no fixed currencies. In reality a currency does not maintain some magical value just because the government decrees it -- not if that country is engaged in trade with the rest of the world. To maintain a "fixed" exchange rate, what happens is that that country's central bank must buy or sell its own currency in order to manipulate its value on the exchange markets -- that's how the price is "fixed". This can be an expensive exercise, especially when the currency is naturally tending to lose value, and the country must blow out its reserves of foreign hard currencies to prop up its own currency. (eg, India recklessly uses US dollars to buy Rupees, in order to create artificial demand for the Rupee, and prop up its price to stay at the pegged value.) Eventually countries decide it's not worth the expense of manipulating the currency (or they go broke in the effort and run out of hard currency to work with), and just decide to let it trade freely the way God intended.