(a) There will be foreign exchange reserve holdings by the central bank.
(b) Each account in the Balance of Payments can individually be equal to zero.
(c) Exchange rate is determined by market forces.
(d) There is central bank intervention in the foreign exchange market.
Exchange rate is determined by market forces.
Under the floating or flexible exchange rate system, the basic feature is that the exchange rate is determined through the operation of market forces (demand and supply). India’s exchange rate system is managed flexibility that is a hybrid exchange rate system. Here also, the exchange rate is basically determined through market forces.
Usually, there is no forex reserve holding under flexible ERS. Similarly, there is no central bank intervention in the forex market to stablise the local currency.
Each account (current account, capital account) can’t be individually zero.