WELCOME PRESENTED BY HARIKRISHNAN

RULE FOR QUOTING EXCHANGE

RATE REGIME IN INDIA-

EVOLUTION,DEVELOPMENT AND

PRESENT STATUS

INTRODUCTION

International business necessitates exchange of

different currencies between people and organisations.

Currency exchange takeplace on the basis of exchange

rates.

An exchange rate is the value of one currency in terms

of another currency.

The exchange rate is influenced by a number of

economic factors.

It is determined on the basis of certain system and is

controlled by the Monetary authorities of each

countries.

EXCHANGE RATE REGIME DEFINITION

The exchange rate regime of a country is

basically the foreign exchange policy of that

country.

The term “exchange” for most of the time refers

to foreign exchange.

The exchange rate regime therefore is the way a

country manages its foreign exchange policy.

EXCHANGE RATE REGIME

The mechanism,procedures,institutional

framework,and regulatory provisions followed in

determining and controlling exchange rate of currencies

is referred to as the exchange rate regime.

Exchange rate systems may be grouped in

the following four categories;

1) FIXED RATE SYSTEM

2) FREELY FLOATING RATE SYSTEM

3) MANAGED FLOATING RATE SYSTEM

4) PEGGED RATE SYSTEM

1) FIXED RATE SYSTEM

In this system, the exchange rates between the home

currency and other foreign currencies are held constant

and are allowed to fluctuate only within narrow bands.

When exchange rates move beyond the permitted

boundaries, the monetary authorities of the country

intervene to maintain the exchange rates within the

boundaries.

The authorities may even devalue its home currency

against other currencies to maintain stability in

exchange rates.

2) FREELY FLOATING EXCHANGE RATE SYSTEM

Under the system, the exchange rate between the

home currency and a foreign currency is determined

solely by the market forces of demand and supply of

that foreign currency, without any intervention by the

Govt of the country.

This system, the exchange rate fluctuates on a

continual basis in response to demand and supply

forces in the market.

3) MANAGED FLOATING RATE SYSTEM

Under this system, it lies between the fixed rate

system and the freely floating rate system.

Under this system, the exchange rate is primarily

market determined, based on the demand and

supply conditions in the market.

4) PEGGED EXCHANGE RATE SYSTEM

In this system, the value of the home currency is

pegged to a specific foreign currency (e.g. ; the us

dollar), or to a basket of foreign currencies, or to a

unit of account such as the SDR(Special Drawing

Right).

In the case of a currency which is pegged to the

dollar, its exchange rate with other currencies

would be line with the movements of these

currencies against the us dollar.

E g ; If the dollar is appreciating against the euro, the

home currency would also appreciate against the

euro, as it is pegged to the dollar.

EVOLUTION OF THE EXCHANGE RATE REGIME IN INDIA

As different exchange rate system were being

followed in the global scenario, the Indian exchange

rate regime also underwent changes in line with the

global developments.

At the time of independence in 1947, the Bretton

woods system was the exchange rate system

prevailing in world.

India also adopted this system

for its exchange rate management. The

value of the rupee was fixed in terms of

gold as the equivalent of 0.268601 g of

fine gold, as required under the Bretton

woods system.

At the same time, the rupee was pegged to the

pound sterling in view of India's long- standing

economic and political relations with England.

When pound sterling was devalued in September

1949, the rupee was also devalued by the same

percentage so that the sterling rupee exchange rate

remained unchanged, but the gold content of the

rupee fell to 0.186621 g.

On June 6, 1966, the rupee was again devalued

against pound sterling by 57.5%. Consequently, the

rupee sterling exchange rate changed. The gold

content of the rupee fell further to 0.118489 g.

In 1967, the pound sterling was also devalued.

When the Bretton woods system collapsed in August

1971, the rupee was pegged to the US dollar at RS.

7.50/US $ for a short period till December 1971 .

As pegging to the US dollar was found to be

ineffective in stabilizing exchange rates, the rupee

returned to sterling peg in December 1971 at a parity

of RS. 18.9677 per pound sterling, with a margin of

2.25% on either side.

On June 23, 1972, the sterling was put under floating

rate and the rupee – sterling parity was revalue at

RS.18.95 and then in October , the parity was again re

fixed at Rs.18.80 per pound sterling.

As pound sterling continued to be under the floating rate

system, the RBI decided to delink the rupee from pound

sterling.

In September 1975, the rupee was pegged to an

undisclosed currency basket with a margin of 2.25% on

either side.

But pound sterling was retained as the intervention

currency with a parity rate of RS. 18.3084 per sterling.

During the 1980s, a widening gap developed between the

administered exchange rate and the real value of the rupee.

July 1991, the rupee was devalued by 22% and the rupee –

dollar exchange rate moved from RS.21..20 to RS. 25.80 per

US dollar.

March 1992, a dual exchange rate system was introduced

in India with an official exchange rate prescribed by the

RBI and a market determined rate, both operating

simultaneously.

March 1993, the dual exchange rate system was

discontinued and a unified market determined exchange

rate was applied for all transactions.

August 1994, that is, the rupee become freely convertible

at market determined rates on all items of current account.

In early 1997, the Tara pore Committee was constituted to

study the feasibility of introducing capital account

convertibility in the country.

The committee submitted its report in June 1997,

recommending a phased removal of restrictions on capital

account transactions and introduction of capital account

convertibility by the year 2000, provided certain

macroeconomic stability criteria could be achieved.

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