Clean float

A currency can get its price in one of three ways.

It can be fixed to something — another currency, or a basket of currencies. That is a peg.

It can be left entirely to the market. Buyers and sellers meet, and the price is whatever they agree. Nobody steps in. That is a clean float, also called a pure exchange rate.

Or it can sit in between. The rate moves with the market most of the time, but the central bank intervenes when it does not like where the market is going. The workbook calls this a dirty float, and the more polite name for the same thing is a managed float.

So a clean float is defined by an absence. No government rules or laws affect the pricing of the currency.

The majors trade this way. The workbook lists the euro, the dollar, the yen, the pound, the Australian and Canadian dollars and the Swiss franc as following free floating valuation.

The three regimes, in the workbook's own words (Chapter 1, section 1.1):

How intervention actually works. The workbook's illustration of a managed float is a central bank that lets its currency float between an upper and a lower price boundary. If the price moves beyond those limits, the bank may buy or sell large lots of currency to rein it in. Its example: if the domestic currency depreciates quickly against the dollar, the central bank may sell dollars and buy local currency.

Where the rupee sits. Not in the clean-float column. Chapter 1 says the rupee has a market-determined exchange rate, but that the RBI trades actively in the USD/INR market to impact effective exchange rates, so the regime is a de facto controlled exchange rate, sometimes called a managed float. Two qualifications matter for the exam:

• India has not pegged the rupee, unlike China. There is no specific foreign currency and no particular rate it is held at.
• RBI intervention is stated to be solely to ensure low volatility, not to influence the rate or direction of the rupee.
• Rates other than USD/INR, such as EUR/INR and JPY/INR, show the volatility typical of floating rates.

No figure. The workbook gives no threshold, band width or intervention limit for a clean float, and none for the rupee's managed float either. The concept is qualitative, and the only numbers nearby belong to other regimes — the ±1% Bretton Woods band, for instance, which is a peg and not a float at all.

Same shock, three regimes. Illustrative, built on the workbook's own USDINR level of 83 and its description of boundary intervention. A large importer needs to buy USD 20 million in one morning. The market is thin.

The Rs 80 lakh gap between the first and third rows is the point of the classification. A clean float passes the whole shock to the price. A managed float absorbs part of it onto the central bank's reserves.

Reading the regime off the pairs. The workbook's own contrast:

So a rupee hedger and a euro-dollar hedger are not facing the same kind of risk, even though both use exchange-traded contracts.

Chapter 1, section 1.1, defines clean float and dirty float in adjoining sentences, and section 1.2.1 classifies the rupee as a managed float. The chapter's first sample question is exactly this: which term best describes the EUR, with managed float, pegged to USD and pegged to gold as the wrong answers and free floating as the right one. Expect the mirror question about the rupee, where managed float is right and "clean float" and "pegged" are both wrong.

• Clean float and dirty float are opposites; dirty float and managed float are the same thing. The workbook uses "dirty float (also known as managed float)".
• The rupee is not a clean float. It is market-determined with active RBI intervention — a managed float.
• Nor is the rupee pegged. The workbook says India, unlike China, has not pegged the rupee to a specific currency at a particular rate.
• A clean float means no government rules affect the price at all — not merely that the price usually moves freely.
• The euro, dollar, yen, pound, AUD, CAD and CHF are the free floaters the workbook names. The rupee is not on that list.
• RBI intervention is described as being for low volatility, not for direction. A question claiming the RBI intervenes to set the level of the rupee is misstating the workbook.