INDEPENDENT UNIVERSITY, BANGLADESH

Topic: Economic relationship between Bangladesh and India

International Financial Management

Course ID: Fin 480

Section- 01

Group Name: Rider

Submitted To:

Mr. Dr. Samiul Parvez Ahmed

Assistant Professor, Head of Finance Department,

School of Business,

Submitted By:

Name ID

Shahida Haque Princess 1320288

Md. Ahad Majumder 1310481

Ibrahim Bepari 1420442

Rasheda Sultana 1430236

Abia Sultana Auny 1430118

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 LETTER OF TRANSMITTAL
November 27th, 2017
Mr. Dr. Samiul Parvez Ahmed
Assistant Professor, Head of Finance Department,
School of Business,
Independent University, Bangladesh.

Subject: Submission of Assignment on Economic relationship between Bangladesh and

India

Dear Sir,
It is a great pleasure for us to submit a report on Economic relationship between Bangladesh
and India. We have prepared this report as a partial fulfillment of the course entitled
International Financial Management (Course Code: FIN-480).

We have worked hard to gather valid information and tried our best to prepare this report
perfectly. We have learnt a lot preparing this report that will help us in our practical life. We will
be obliged, if you kindly accept this report.

Sincerely,

Shahida Haque Princess

Md. Ahad Majumder

Ibrahim Bepari

Rasheda Sultana

Abia Sultana Auny

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 ACKNOWLODGEMENT

First of all we would like to pay our gratitude to almighty Allah, who has given us patience to
complete this business plan report. Because working on this report and preparing a report
regarding our experience is quite tedious job.

We would like to thank Independent University, Bangladesh (IUB) for planning such a course
that gave us the chance to gather knowledge about what we learn. The knowledge we gathered
throughout the course would help us to develop our future career.

Then we would like to convey our gratitude to Mr. Dr. Samiul Parvez Ahmed our course
instructor, to guide us selecting the areas of this report and doing the report in a perfect way.

We are grateful to our parents for being our mental support.

Lastly, we are also grateful to our friends for their endless inspiration not to be hopeless and keep
working harder.

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 Table of Contents

EXECUTIVE SUMMARY ............................................................................................................5

LITERATURE REVIEW .................................................................................................................. 6-12
Economic relationship between India and Bangladesh ........................................................... 12-16

Exchange Rate Fluctuations ................................................................................................... 17-18

Contemporary issues impact on Bangladesh Trade ................................................................. 18-20

Forecasting ............................................................................................................................... 21-23

Conclusion .....................................................................................................................................23

Reference ................................................................................................................................. 24-26

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 Executive Summary

The report aims at economic relationship between Bangladesh and India also tread dependency
and exchange rate policies etc. we collect 10 years of both countries currency rate fluctuation
rate.

The trading relationship between India and Bangladesh is currently of special interest in both
countries for a number of reasons. Firstly, there are urgent and longstanding concerns in
Bangladesh arising from the perennial, large bilateral trade deficit with India, and from the large
volumes of informal imports from India across the land border which avoid Bangladesh import
duties.

Finally we can find out contemporary issues that may have impact on exchange rate and the
conclusion is given here appropriately.

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 Literacy Review

Factors that influence exchange rates:

From a macroeconomic point of view, exchange changes can have strong effects on the
economy, as they may affect the structure of output and investment, lead to inefficient allocation
of domestic absorption and external trade, influence labor market and prices, and alter external
accounts. Roubini (2000) stated that the economic phenomenon could be influenced by the
changes in macroeconomic variables. Changes in economic phenomenon will also cause the
movement in exchange rate at domestic level.

Inflation rate:

As we know there are five macroeconomic factors that are influence exchange rates. The main
macroeconomic variable such as inflation rate will cause the changes in exchange rate
movement. However, Achsani (2010) estimates the term inflation can be defined as the increase
average price of good sustain for a period. For the Asia, there is positive significant way causal
relationship between inflation and real exchange rate of the country. But in European Journal of
Economics, Finance and Administrative by Kamin (2003) empirically found that the
relationships between inflation and the real exchange rates in most countries of Asia and Latin
America shown a negative relationship. Furthermore, the effect of exchange rates changes on
inflation in Latin America was significantly correlated. Rehman (2010) found that inflation
positively affected exchange rate whereas, interest rate influence on exchange rate was negative.

Hossain (1989) investigated and studied with different Contrary to the Keynesian view, the study
supported the monetarist view and concluded that changes in the real money balances of the
people in these countries had a significant impact on the acceleration of inflation. The study
further mentioned that changes in bond-financed government expenditures did not have any
positive effect on inflation in these countries except Bangladesh.
Sawiski (2008, p. 415) stated in theory the exchange rate should reflect the trends in inflation
and productivity. Sawiski (2008, p. 421) also stated that a rise in expected inflation produces

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exchange rate depreciation. However, such reasoning describes the long-term relationship. In
short run other factors, such as carry trade and speculations, have significant role.

Simon (1997) found that exchange rate and current account have direct and positive relationship
with inflation and both exchange rate and current account are the key factors that badly affect the
small economies.

Arize (2004) investigated to test the hypothesis that changes in nominal exchange rate play a
significant role in the variation of inflation. The empirical results obtained supported the
hypothesis of the study. Two alternative approaches i.e. recursive and rolling measures were also
used by the study to find out the robustness of the relationship between the two variables. The
results showed the same results for both variables. The study concluded that the authorities in
these countries should consider the implications of exchange rate variability by making strategies
for controlling the inflation.

Broda (2006) stated that for developing countries, with fixed exchange rate system, the inflation
rate was 20 percent higher in comparison to those countries which had flexible exchange rate
systems. The study also found the same but a comparatively weaker relationship for industrial
countries.

Interest Rate:

There are five macroeconomic factors that are influence exchange rates. The main
macroeconomic variable such as interest rate will cause the changes in exchange rate.Interest rate
is the amount expressed as a percentage of principal by a lender to borrow for the use of assets.
Interest rates are typically noted on an anual basis known as the annnual parcentage rate. The
assets borrowed could include cash, consumer goods, large assets, such as a vehicel or
building.Interest is essentially a rental or leasing charge to the borrow for the assets use. in the
case of a large asset like a vehicle or building the interest rate is sometimes known as the lease
rate. When borrow is a low risk party they will usually be charged a low interest rate, if the
borrow is considered high risk the interest rate that they are charged will be higher.

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In this lecture we will learn how exchange rates accommodate equilibrium in financial markets.
For this purpose we examine the relationship between interest rates and exchange rates. Interest
rates are the return to holding interest-bearing financial assets. In the previous lecture we have
pointed out that as being a financial asset exchange rates tend to adjust more quickly to new
information that goods prices. Like exchange rates, interest rates are also the prices of financial
assets and hence adjust quickly to new information.

If a country keeps its interest rates at a relatively high level, it usually attracts large short-term
capital flows and the currency of this country appreciates (Miska-Struzik, 2012).

In 2000-2001, the interest rate in Poland was significantly higher than in the euro area and during
this period the zloty appreciated, which is supported by the theory. In 2002-2003, the difference
between interest rate levels decreased, and the zloty depreciated. In subsequent years, there has
been no longer such a clear relationship.

In 2010, the zloty was appreciating, which could not be justified by changes in interest rates.

Low interest rates and cheap credit also cause people to act foolishly or greedily... (Fareed
Zakaria, The Post-American World).

Income level:

The income effect represents the change in an individual's or economy's income and shows how
that change impacts the quantity demanded of a good or service. The relationship between
income and quantity demanded is a positive one; as income increases, so does the quantity of
goods and services demanded. For example, when an individual's income increases, that person
demands more goods and services, thus increasing consumption, all things equal.

In 2004 Li and Zou. Incorporate a political economy argument for public spending in an
overlapping generation model to test the classical assumptions that the working class saves zero
percent of their income and entrepreneurs save the larger fraction of their income. The argument
they pick is about the decision of spending on public good. Instead of a flat assumption regarding

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the decision of spending on public good they borrow the proposition of a voting mechanism for
public good (Alesina and Rodrik, 1994; Persson and Tabellini, 1994; and Perroti 1993). Such a
mechanism would bring forth the decision of the median voter. They assume that the tax rate is a
function of the income distribution and from there; they conclude that if this relationship is
positive then it increases taxes and as a result savings decline and for if this relationship is
negative then it decreases taxes and as a result savings increases.

In 2013 Mendes. Inequality and Growth: an overview of the theory with the argument of
investment indivisibility. According to this argument, when productive activities require large
sunk cost and people cannot turn to a credit market to borrow for investment, the only way to
have a large lump of money to make investment possible is concentrating income and wealth in
the hands of a small group in the society. The poor in this way would have a small share of the
national income only benefitting from the trickle down effect of the growth form new
investments. On the other hand, an increase in inequality renders more people with lesser
capacity to invest. This fall in investment can only be compensated by increased investment from
those who are capable of investing as much as they want to. This increase in demand for capital
would only happen if the interest rate falls. However, in a situation where savings is interest
sensitive, a fall in interest rate would eventually discourage savings.

In 1994 Modigliani and Bromberg, and 1957 Friedman. Research the savings behavior through
the permanent income hypothesis. According to the permanent income hypothesis, despite the
cross-sectional correlation of savings and income, consumption ultimately coincides with
income. Since, cohorts smoothen their lifetime consumption and consume savings at a future
date, when they have no more income inflow.

Government control:
In todays world with a rapidly increasing global economy and constantly changing international
trade laws and technology, the exchange rate plays a role in valuing farm production and
equipment. Exchange rate determination varies from country to country and from one period to
another. Government policy of gradual depreciation of exchange rate is to encourage export and
reduce the high import dependency of the economy. In an effort to balance import and export

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government sometimes adopt different exchange rate regimes and pricing method. This review is
aimed at determining the effects of government control on fluctuation of exchange rate.

Asinya, F. A. (2004) were concerned that many financial officers believe that wherever a
currency of account has fluctuations relative to the local currency, the market value of the firm
will change and this opinion must be considered under some specific assumptions necessarily
that had never been elaborated clearly until that time. Baily, M. J., & G. S., Ulan, M. (1987)
provided supportive evidence in Mexico that multinational firms will debt in foreign currency
have less sensitivity to exchange rate fluctuations compared with firms that just operate through
domestically

Edward Schuh (1974) argued that the over value dollar caused the decline in agricultural exports
due to their relative expense in other countries. The overvalue dollar led to depressed prices and
lower farm profits, causing an under valuation of farm resources and over supply of output.
Schuh (1984) again blamed that change in import and exports on changes in the value of the
dollar. The result of the shift to flexible exchange rate was of great significance because of the
emergence of well integrated international capital markets. These changes in the value of the
dollar had an impact on the level of exports and imports.

Macros Antonio Mendoza (2014) stated that each country has a central bank that may intervene
in the foreign exchange rate to control its currency value. A government controlled central bank
may also able to control the money supply growth in the country. The government regulates
exchange rate only indirectly. Thats because most exchange rate are set on the open foreign
exchange market. For example if it lowers the rate, that drives down interest rate throughout the
US banking system. It also reduces the supply of money. Both of those make the dollar stronger
relative to other currencies. Thats because US dollar denominated credit has become more
expensive. At the same time, dollar denominated asset generate a higher return. Both create more
demand for the dollar, while taking it out of circulation. The laws of demand and supply tell that
less supply and more demand drives up the price.

Levin, J.H. (1997) stated that an exchange rate appreciation causes a slower growth of real GDP
because of a fall in net exports and a rise in the demand for imports. The treasury department is
also a government agency that indirectly affects the exchange rate. It prints more money, which

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increases the supply, weakening the dollar. It can also borrow more money from other countries
by selling treasury notes. Thats not only increases the supply of money, it also increases the
supply of debt. Both will send the dollars value down.

Expectation:
The topic of currency exchange rates and factors influencing their changes have been reviewed
by many scholars in the last decades and still remains to be one of the hot topics in international
economic studies. The first attempts to analyze exchange rate behavior were done by Rudiger
Dornbusch in 1973, Richard Meese in 1979 and Kenneth Rogoff in 1983. Marrewijk (2007)
stated that the Dornbusch model analyses exchange rate adjustments considering sticky prices
and rational expectations. In the essay of purchasing power parity he made it clear that it remains
an important concept, though the evidence in recent years is more remarkable for deviations
from, than observance of, such parity.

Some researcher does not agree with the statement that the exchange rate is determined
exclusively by fundamentals. J.A. Frankel and K.A. Froot (1990) argue that the high value of the
US dollar in 1984 and 1985 can best be explained as speculative bubble, based on the self-
confirming market expectations driven by the increasing in forecasting weight given to the
chartist as a result of their previous forecasting success. According to Galati C. Ho (2003) news
may play an important role in fluctuations of the exchange rate. The result of the study shows
that good news bring appreciation while bad news depreciates currency.

Ghosh & Wolf, Holger.(2002) stated that the worlds current situation must not be ignored when
trading in foreign exchange market, as it can affect the market as much as anything else. Many
traders have a news website open aside their trading platform, so they stay on top of world
events. However, when paying attention to world events, it is very important to differentiate
between real accurate news and fabricated rumors reported on the various media channels.

Grauwe, Paul D., & Gunther (2004) blamed that many financial institutions will deliberately
release a news report about a financial development, with the intention of making the market
move up or down, depending on a current position. Before acting on a piece of news, verify that
it is in fact real, then after you establish that is, check again.

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Kenen & Rodrik, D (1986) Investigated that the foreign exchange market is so big, no one
person or institution can have a real impact on the price of currency. However, temporary
fluctuations have been known to occur as a result of intervention by one institution or another.
For example in 2002 the bank of Japan watched the USD depreciate at a rate they believed was
too rapid. They worried about the effect this would have on the competitiveness of Japanese
exports to the US. The Japanese government decided to get involved and buy large sums of
USDs, sometimes reaching numbers as high as 10 billion at a time. The market did not seat by
quietly when one of these orders were placed. The USD would jump up to 150 pips within a few
minutes. The Japanese government employed this tactic more than once and at different prices
every time.

Economic relationship between India and Bangladesh

Economics has played a significant role in the bilateral relations between India and Bangladesh.
The economic relations between the two countries have been multifaceted, embracing trade
transactions, credit arrangements, joint ventures, transit facilities and transport development.
These relations have continued and expanded even in situations of adverse political relations.
This is mainly because of the operation of objective factors like geographical proximity,
common language, similarity of consumption pattern, common development needs and
experience, and commonality of the inherited infrastructure.

The recent visits by prime ministers of both countries have added to the structure of bilateral
relations and it will create a win-win Bangladesh-India relation for both these countries.
However geographically small Bangladesh is compared to huge India which indicates that India
is realizing more and more that Bangladesh is a vital, important and crucial partner in the growth
of the region. A number of recent developments is described below:

On 9 March 2016 Bangladesh signed an agreement with the Exim Bank of India to fund US $2
billion in low cost loans for a number of social and developments projects. This is the largest
credit line that India has extended to any country.

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The two countries have also signed key partnership in the energy and power sector. Bangladesh
will start receiving 100 megawatts of power from the 726 megawatt thermal power plant in
Tripura from 23rd March. The state owned Indian electrical Company, Bharat Heavy Electricals
Limited, has recently signed a memorandum of understanding on a US $1.6 Billion power
project at Khulna, Bangladesh.

Bangladesh already draws 600 megawatt from the Indian grid, with another 500 megawatt to add
through the Bheramara-Bheramara inter-connection. The two countries have agreed on a power
evacuation scheme between Assam and Bihar, from which Bangladesh can Draw 1000 MW
power supply through tapping points at Parbatipur.

Beyond the energy sector, Bangladesh and India have taken some important steps to enhance
connectivity. Bus service linking India and Bangladesh have been established and multiple
agreements signed to enhance trade by improving maritime cooperation. This includes a
memorandum of understanding on the use of the Bangladeshi ports of Chittagong and Mongla,
which would enable the movement of goods to and from India. Recently Railway transportation
system has also been added between these two countries and the name of the train is Bandhan
Express.

The respective business communities and Chambers of Commerce have also played a decisive
role in improving ties. Bangladeshi firms, in particular, have shown a willingness to open up to
further trade and competition, and have played a stellar role in bolstering the economic
relationship, despite the trade balance being in favor of India. Their approach has ensured
Bangladesh has reaped significant benefits. Bangladeshs export growth fueled by increases
in inputs from India has been substantial enough to offset any negative impacts from the trade
deficit with India.

Cattle smuggling is another factor which is harming Bangladesh economy. If it doesnt come
from India then our dairy farmers can go up and we can take care of ourselves.

Trade Dependency:
International trade acts as a potent force for bridging spatial differences, promoting mutual
cooperation and fostering healthy inter-dependence between two neighboring countries. For both

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India and Bangladesh bilateral trade is one crucial component based on which their foreign
relationship thrives. The importance of bilateral trade has increased further in the era of
globalization as countries tend to open up their markets to welcome economic liberalization.
Nevertheless, it is an aspect of their neighborhood relations which does not confine only to the
realm of economics but instead has various other components appended to it. Bilateral trade
scenario between India and Bangladesh seem to be essentially multidimensional in nature when
looked from the perspective of the bordering states.

Petrapole and Benapole: The Petrapole Road LCS is the busiest and largest one in the country. It
handles the bulk of formal cross-border trade between India and Bangladesh. But it is the only
Electronic Data Interchange (EDI) LCS in India from where all exports are processed under
ICES 1.5. The LCS office at Petrapole is located adjacent to the Indo-Bangladesh border.

Benapole is the border check post on the Bangladesh side of the border. It is the most important
land port of Bangladesh which provides a lucrative market for the Indian exporters through its
provision for cheaper services and low equipment charges. It is geographically situated at a
crucial strategic point owing to its close proximity to Kolkata which is one of the major
commercial hubs in this region. Although Petrapole-Benapole border acts as the lifeline for
Bangladesh because maximum of its surface trade with India is carried out through this border
which represents much of an imagined boundary.

Import and Export; Product and Procedures:

About 80% of Indias total exports to Bangladesh take place through the Petra pole border check
post. Together with the handling of trade imports and exports through land it also keeps a
detailed account of cross border mobility of people, goods and services. In comparison to the few
traditional items of import from Bangladesh like jute, betel nut, fish, cotton rags, ready-made
garments (RMG), rice bran, re-processed plastic agglomerates, zinc plates and a few more items;
India exports items ranging from cotton fabrics, chassis, raw cotton, steel/iron, chemical/dyes,
synthetic fabrics, 2/4 wheelers, machinery items/parts, books, papers, baby food, agricultural
products and many more. The following figure will provide a list of 10 major commodities of
import and export.

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 Table1: Indias Major Import and Export Commodities.

A bulk product of export is fabric which includes raw, cotton or synthetic fabrics from the big
companies like Raymonds and Bardhhaman. Apart from these, Marks and Spenser, Maxx,
Reliance Trend and Tata have an international market in Bangladesh. On the import side, apart
from jute (which is a traditional item of Bangladesh) the duty free access of the RMG has come
up in a huge way. About 80% of its production in Bangladesh goes to the outer markets of
Europe and other parts of the world. Betel nut is also a major product of import in India from
Bangladesh. The Indonesian variety of betel nut undergoes value addition while passing through
Special Economic Zones (SEZs) in Bangladesh thereafter which it comes to India.

India also imports fish from Bangladesh. Hilsa fish which used to be a big item of export to India
previously has been banned since 2012 due to its unsustainable demand in West Bengal that
hampers Bangladeshs greater national and international trade interests. However, very less
amount of fresh water fish is imported by India and that too from the Bangladeshi local markets,
but on the contrary fish from Andhra Pradesh, mainly Rah and Katla, are widely exported to
Bangladesh.

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The processes followed to operationalize trade at the border entail sending of notification by the
CWC on the basis of which the entire process of export at the border starts. Indian trucks go
inside Bangladesh up to 1.5 km till the port area; while Bangladeshi trucks also enter India where
they load and unload themselves with their cargoes. It involves certain established procedures by
virtue of which trucks coming at the border undergo checking and are then allowed to cross the
border.

The total value of import at the Petropolis LCS in the year 2013-2014 was Rs. 1,833.59 Core;
whereas the total value of export was Rs. 11,836.16 Cores. The import duty collected from there
from was Rs. 27080.37 Laces in the year 2013-2014 and the export Cass/duty collected was Rs.
8.65Lacs in the same financial year. The following charts will provide the details of Import and
Export Value (Table 2) over the last five years as well as the information of the Import and
Export Duty (Table 3) collected since 2009.

Exchange Rate Fluctuations

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In this INR/BDT chart we can see that currency rate history for up to 10 years. We can say that
in 2008 to 2012 BDT exchange rate is highly fluctuated which means BDT currency value
depreciate compare to INR currency value. On the other hand, 2013 to 2017 BDT exchange rate
is low fluctuated which means BDT currency value appreciate than INR currency value. Now in
23th November 2017 last updated exchange rate INR/BDT is 1 INR = 1.30314 BDT.

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Another scenario is BDT/INR chart we can see that currency rate history for up to 10 years. We
can say that in 2008 to 2012 INR exchange rate is low fluctuated which means INR currency
value appreciate compare to BDT currency value. On the other hand, 2013 to 2017 INR
exchange rate is highly fluctuated which means INR currency value depreciate against BDT
currency value. Now in 23th November 2017 last updated exchange rate BDT/INR is 1 BDT =
0.767377 INR.

Contemporary issues impact on Bangladesh Trade

The Holy Artisan Attack:
Export driven Bangladeshi readymade garment sector has got a setback at the first month of the
financial year 2016-2017. After having 10 percent growth in the last financial year, July 2016
export fall short of its target by 23.6 percent as per the information of export promotion bureau
of the country. Many around the sector think that this would be the aftermath of the recent terror
attack in a restaurant in Gulshan, Dhaka. This has suddenly changed the perspective on
Bangladesh. It also affects our currency value ultimately it depreciate against Indian currency.
Fear and uncertainties about foreigners visit to Bangladesh. Economic development of
Bangladesh is apprehended to bear the brunt of this incident. Countries which lost their citizens
on that horrifying night - Japan, Italy and India - are all important partners of Bangladesh's
development. Bangladesh has to work hard in bringing back the confidence of investors,
development partners and the foreign community. The damage has already been done through
worldwide media coverage. Now Bangladesh needs to reassure foreigners working here about
their safety.

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Rana Plaza Collapse:
The collapse of Rana Plaza has received vast international attention and strong criticism. Soon
after the devastating collapse, there was an outbreak of protest on a global scale and the lack of
compliance with the building standards had come to forefront. It has also raised significant level
of questions with respect to ethical values of the people working in the factory. Following the
collapse of Rana Plaza, an immediate fall in GDP was anticipated which also affected our
currency value. Such a fall have affected all the stakeholders globally involved in the supply
chain of the RMG export system as opposed to affecting just Bangladesh and local enterprises.

Political Violence:
But after many years of independence we are observing that sufferings of common people, lack
of mutual respect and trust among political parties. Sufferings of general people have reached a
stage where security of life and livelihood is terribly ignored. Especially in the year of 2013 and
2014 during election time the political situation of Bangladesh was so much unstable that also
currency value depreciated as well as the foreign investor was not inspired to do their business
properly which ultimately reduces the trade as well as the GDP of our country.

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Natural Calamity:
The economy of Bangladesh is based on Agriculture mainly, with two thirds of the population
engaged on Agricultural activities; although the country is trying to move towards
industrialization slowly during the last one and a half decade almost. So, the overall impact of
Climate Change on Agricultural production in Bangladesh would be wide spread and devastating
for the countrys economy. Temperature and Rainfall changes have already affected crop
production in many parts of the country and the area of arable land has decreased to a great
extent. It ultimately causes the higher price of our daily necessary things. The Salinity intrusion
in the coastal area is creating a serious implication for the coastal land that was traditionally used
for rice production. For example, recently the price of rice has risen so much that we have to
import from our neighboring country India.

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 Forecasting
Purchasing Power Parity (PPP):
The absolute form of PPP suggests that similar products in different countries should be equally
priced when measured in the same currency.

Forward Premium:

F = S (1+p)

= .77 (1+.0237)

= .788

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This forecast of the percentage change in the Indian rupee can be applied to its existing spot rate
to forecast the future spot rate at the end of one year. The existing spot rate of the India .77, the
expected spot rate at the end of the year will be .788

International Fisher Effect (IFE):

International fisher effect uses interest rate rather than inflation rate differentials to explain why
exchange rates change over time, but it is closely related to the PPP theory because interest rates
are often highly correlated with inflation rates.

Real rate of return = Nominal interest rate inflation rate.

Home: 6.75-6.04= .71

Foreign: 6.00-3.58= 2.42

Forward Premium:

F = S (1+p)

= .77 (1+.0167)

= .757
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The spot rat of India is .77, percentage change is .0167 and expected forward rate is .757.

International Fisher Effect (IFE) is based on Purchasing Power Parity (PPP), it will not hold
when PPP does not hold. There are factors (interest rate, government debt, and terms of trade)
other than inflation that affect exchange rates, the rates will not adjust in accordance with the
inflation differential.

Conclusion

This study shows that floating exchange rate period has constructive effect on economic growth.
The transition period from fixed rate period to Floating rate period was quite smooth and stable.
There is significant growth in the fundamental economic variables on the long path of the new
exchange rate regime. The trend of export, workers remittances and foreign reserves have been
analyzed and found considerable growth on these variables. Nevertheless, the ongoing exchange
rate depreciation along with high inflation is becoming a challenging issue for the regulators and
Government as well. The gap between demand and supply of foreign currency in the market is
getting bigger in the high inflationary economy which lead continuous loses in the value of the
local currency. The key reasons have been found for the currency depreciation are inflation,
government debt, trade deficit, low FDI etc. The study recommended some issues for
Governments and Centrals banks part. The regulation should be proactive rather than reactive.
There are some potentialities in this new regime; to reap this potentiality, Government as well as
regulators should take effective steps.

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 Reference

Roubini, K. S. (2000). Exchange rate Anomalies in the Industrial Countries Journal Of

Monitory Economics,, 560-587.

Achsani, N. A. (2010). The Relationship between Inflation and Real Exchange Rate:
Comparative Study between ASEAN, the EU and North. European Journal of Economics,
Finance and Administrative Sci., 18: 69- 76.

Kamin, S. A. (2003). A Multi-Country Comparison of the Linkages between Inflation and

Exchange Rate Competitiveness International J. Finance and Economics, 8(2): 167-184.

Rehman et al (2010) Relationship between the Inflation, Interest rate and Exchange rates by
using monthly data over the period 1994 to 2009.

Hossain (1989) Causes of Acceleration in Inflation in South Asian countries i.e. (India, Sri
Lanka, Bangladesh, Nepal and Pakistan) by using annual data within the range of 1961 to 1988.

Sawiski, A. (2008). Poland's Exchange rate Policy before Joining the Euro Zone, in: H.
ukowska, M. ukowski (ed.), The Banking System in Poland, UMCS Lublin.

Simon W.L.S. (1997), Is There Life Outside the ERM? An Evaluation of the Effects of
Sterling's Devaluation on the UK Economy, International Journal of Finance and Economics,
2,199-216.

Arize et al (2004) analyzed The Relationship between Exchange rate and Inflation by using a
quarterly data from 1973: QII to 1998: QI for 82 countries.

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Broda (2006) investigated The Relationship between Exchange rate and Price Levels used
annual data from 1980 to 1998 for more than 100 countries.
Lane, P. (1999). What Determines the Nominal Exchange Rate? Some Cross-Sectional
Evidence, The Canadian Journal of Economics, Vol. 32, No. 1.

Miska-Struzik, (2012) How keeps Interest rate of a country. p. 212-213.

Bilski, Janicka, (2007-2008) exchange rate fluctuated in accordance with the interest rate. p.101.
Roubini, K. S. (2000). Exchange rate Anomalies in the Industrial Countries Journal Of
Monitory Economics, 560-587.

MacDonald, R. (1999). Exchange Rate Behaviour: Are Fundamentals Important?, Economic

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