DMPQ- Trace India’s progress towards market exchange rate.

Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries’ exchange rates by buying and selling currencies. It is also known as a dirty float.

India’s exchange rate policy has evolved over time in line with the gradual opening up of the economy as part of the broader strategy of macroeconomic reforms and liberalization since the early 1990s. In the post independence period, India’s exchange rate policy has seen a shift from a par value system to a basket-peg and further to a managed float exchange rate system. With the breakdown of the Bretton Woods System in 1971, the rupee was linked with pound sterling. In order to overcome the weaknesses associated with a single currency peg and to ensure stability of the exchange rate, the rupee, with effect from September 1975, was pegged to a basket of currencies till the early 1990s.

The initiation of economic reforms saw, among other measures, a two step downward exchange rate adjustment by 9 per cent and 11 per cent between July 1 and 3, 1991 to counter the massive draw down in the foreign exchange reserves, to install confidence in the investors and to improve domestic competitiveness. The Liberalised Exchange Rate Management System (LERMS) was put in place in March 1992 involving the dual exchange rate system in the interim period. The dual exchange rate system was replaced by a unified exchange rate system in March 1993. The experience with a market determined exchange rate system in India since 1993 is generally described as ‘satisfactory’ as orderliness prevailed in the Indian market during most of the period. Episodes of volatility were effectively managed through timely monetary and administrative measures.

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