Black market for foreign exchange
Also called: Parallel foreign exchange market · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
A black market for foreign exchange is an illegal market where dollars sell above the official rate. It appears under a fixed exchange rate when the government sets the rate below the market rate, so the rupee is officially overvalued. At that cheap official price, more people want dollars than are on offer. The central bank must fill the gap from its reserves. When the reserves run out, buyers who cannot get dollars legally pay a higher price in an illegal market. The black market therefore shows that the official rate cannot be sustained.
Example
Suppose the market rate would be ₹50 per dollar but the government fixes it at ₹40. Importers and travellers rush to buy cheap dollars, and RBI's reserves drain away. Once dollars cannot be had at ₹40, an illegal market springs up where dollars trade at around ₹50 or more.
Don't confuse with
- Depreciation: a legal, market-driven fall in the rupee's value under a flexible rate. A black-market premium arises only because the official rate is kept away from the market rate.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Speculative attack
- Managed floating
- Forex intervention
- Crawling peg
- Currency board
- Impossible trinity
- Competitive devaluation