Hard Peg

The exchange rate policy where a fixed rate of one currency is set against another is known as the hard peg. For example, the Indian Rupee was pegged to the US dollar at a fixed rate of 80 INR per dollar. Whenever a currency is pegged to another currency, it implies that there shall arise a fluctuation in the price of the currencies concerning others in the same ratio.

Only a certain amount of movement is allowed by the hard peg concerning the pegged currency, which then creates what is known as a band. The exchange rate for currencies is often fixed but eventually, they are allowed to float freely in the market dictated by several market conditions. This happens when the government of one currency no longer wishes to continue the pegging due to several geopolitical or economic reasons.

In the case of crypto, stablecoins are generally pegged to fiat currencies. Tether, for example, has its value pegged to the US dollar. The major advantage of hard pegs is that they are transparent or simple.

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