Intervention by the Central Bank

Intervention by the Central Bank

It is truly said that the foreign exchange is as good as any other commodity. If the country is floating rate for a system and no controls on capital transfers, then the exchange rate will be influenced by economic law of supply and demand. If the supply of foreign currencies exceeds the demand for a certain period, then the exchange will become cheaper. On the contrary, if the offer is less than demand during a certain period, then the exchange will become more expensive. The exporters of goods and services, mainly supply the foreign exchange market. If there is no control on foreign investors, also providers of foreign exchange.

During a certain period if the demand for foreign currency of the bid increases will raise the price of foreign currency in terms of domestic currency, the unrealistic level. This undoubtedly will make imports more expensive and thus protect domestic industry, but it also gives impetus to exports. However, in the short run can disrupt the balance and orderliness of the foreign exchange markets. The central bank will step forward to supply foreign currency to meet the demand for it. This will facilitate the market. The central bank achieves this by selling or buying foreign exchange and absorb the domestic currency. Thus the demand for domestic currency, along with the supply of foreign currency, will hold the price of foreign exchange at the desired level. This is called "intervention by the central bank.