In international business, when we purchase the goods, we needthe currency of the other country. For this, we convert our currency in other country's currency. This is done through bank. Bank takes some commission and deduct service tax for converting our currency.
Due to this type of international business, there will be surplus of any currency and deficiency of other currency. If there is the shortage of any currency and demand will increase. Effect of this will be on the prices of same currency. If the price of any currency will increase, to buy goods in same currency will be costly. It also increases inflation, if goods are bought at same prices. So, central bank will interfere in it. It will buy or sell the currency for changing price of any particular currency. This buying or selling of currency is called currency intervention. For buying any currency, central bank may create his new currency by printing. It is also called exchange rate intervention.
Due to this type of international business, there will be surplus of any currency and deficiency of other currency. If there is the shortage of any currency and demand will increase. Effect of this will be on the prices of same currency. If the price of any currency will increase, to buy goods in same currency will be costly. It also increases inflation, if goods are bought at same prices. So, central bank will interfere in it. It will buy or sell the currency for changing price of any particular currency. This buying or selling of currency is called currency intervention. For buying any currency, central bank may create his new currency by printing. It is also called exchange rate intervention.
Main Aim of Currency Intervention
- To influence domestic currency
- To adjust the volatility of Exchange rate
- To stabilize the exchange rate of domestic currency in international market.
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