Adjustment

Reviewed by Vineeth | Updated on Sep 28, 2020

Introduction

Adjustment is the utilisation of mechanisms made by a country’s central bank to influence the national currency exchange rate. Adjustments are particularly made when the exchange rate is not linked with another country’s currency. This means that the value of the currency is evaluated as per the exchange rate that is floating.

This is seen as a managed floating exchange rate as the central bank of a country is going to intervene in order to reduce fluctuations that are short-term with respect to the nation’s currency.

Breaking Down Adjustments

Central banks will go onto intervene in adjustments if they are of the opinion that the fluctuations in the currency of the nation are of extreme levels. This particularly happens when there is a significant rapid change, be it on the positive or negative side.

When this happens, there will be a telling effect on the country’s economy. Irregular or inconsistent policy adjustments with respect to the mechanism of the exchange rate will lead to uncertainty for investors. This is often referred to as ‘dirty’ managed exchange policy.

Currency Factor

A major application and utilisation of the adjustments are made in the travel industry, especially in shipping. Here, the shipper will charge the currency adjustment factor in addition to account for the risk of volatility which is always attached to the currency exchange rate. The currency adjustment factor might seem like a part of the shipping invoice. It differs depending on the destination.

For instance, the basic ocean freight price for a specific shipment to Sri Lanka is Rs 1,50,000, and if the currency adjustment factor, in this case, is 6%, then the currency adjustment cost would be Rs 9,000. This is included so as to account for the exchange rate variations. The currency adjustment factor can sometimes be insufficient or way more than what is required.

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