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Rise interest rate and Response of Central Bank: Rising interest rate implies that foreign capital is moving inside the country or there is huge inflow
Rise interest rate and Response of Central Bank: Rising interest rate implies that foreign capital is moving inside the country or there is huge inflow of capital. It will lead to appreciation of currency. But for keeping currency value stable, central bank will buy foreign currency from open market and thereby its supply will get reduced and value of currency will be stabilized. Currency is allowed to float: If currency is allowed to float, it constitutes free market system where exchange rate is determined by the demand and supply forces. Huge inflow of capital will depreciate external currency and domestic currency will appreciate
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