The document discusses the evolution of India's exchange rate regime over time. It began with a fixed exchange rate system pegged to the British pound sterling under the Bretton Woods system in 1947. The rupee was devalued several times against the pound in 1949 and 1966 as the pound was devalued. India switched to pegging the rupee to the U.S. dollar briefly in 1971 after the Bretton Woods system collapsed. It later returned to pegging against the pound sterling with margins. In 1975, the rupee was pegged to an undisclosed currency basket. Devaluation of the rupee occurred in 1991. India introduced a dual exchange rate system in 1992 before adopting a unified floating exchange rate system in
2. RULE FOR QUOTING EXCHANGE
RATE REGIME IN INDIA-
EVOLUTION,DEVELOPMENT AND
PRESENT STATUS
3. 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.
4. 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.
5. 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
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.