Flexible Exchange Rate Regime:

Under the flexible or freely floating exchange rate regime, the external value of a country's currency is determined by the forces of demand and supply. The exchange rate for the country is the result of the interaction between demand and supply of foreign currency. Many Countries of the world in recent times have adopted flexible exchange rate with some modifications.

In a flexible exchange rate regime variations in the exchange rate are referred to as depreciation or appreciation. Appreciation means the value of a country's domestic currency has increased relative to foreign currencies. Depreciation refers to a fall in the value of a country's domestic currency relative to foreign currencies. Like appreciation, depreciation is used when a country operates a flexible exchange regime where the forces of demand and supply determine the external value of a country's currency.

The main advantages of flexible exchange rate are: Automatic stabilisation of the balance of payments: Under this regime any balance of payments disequilibrum is rectified by a change in the exchange rate and it prevents overvaluation and undervaluation of the domestic currency since its external value is determined by demand and supply.

The arguments against flexible exchange rate are: Some degree of uncertainty may be introduced into the economy since the value the currency changes from day-to- day. It may also lead to speculation in the foreign exchange markets due to the day- to-day changes in the currency's value.