The document summarizes India's Liberalized Exchange Rate Management System (LERMS) and Modified LERMS. Some key points: - LERMS (1992) introduced partial rupee convertibility, allowing exporters/recipients to sell 60% of foreign exchange at market rates. Importers could buy currency for eligible transactions at market rates. - Modified LERMS (1993) made the rupee fully floating. All foreign exchange transactions were put through by banks at market rates. Exporters could retain receipts and banks could freely sell receipts. - The aims were to move towards full currency convertibility and balance demand/supply of external transactions under a market-determined exchange rate.

1. LIBERALISED EXCHANGE
RATE MANAGEMENT SYSTEM
(LERMS)
PRESENTED BY:- amanpreet
ROLL NO. - 36 (IMS)

2. Introduction
O In view of the continuing pace of liberalization
policy, the Liberalized Exchange Rate Management
System (LERMS) has assumed a special
significance in the arena of international financial
management.
O Already the rupee has been made fully convertible
on current account.
O The main objective of the Government is to move
the rupee finally into the era of full convertibility to
boost exports.

3. LERMS..
O Liberalized Exchange Rate Management System", (LERMS for
short), introduced with effect from 1.3.1992.
O Under the LERMS, Exporters of goods and services and those who
are recipients of remittances from abroad could sell the bulk of their
foreign exchange receipts at market determined rates.
O Similarly, those who need to import goods and services or undertake
travel abroad could buy foreign exchange to meet such needs, at
market determined rates from the authorized dealers, subject to their
transactions being eligible under the liberalized exchange control
system.

4. O By this scheme, partial convertibility of the rupee was introduced.
40% of the foreign exchange received on current account receipts,
whether through export of goods or services alone needed to be
converted at the official rate, while take remaining 60% was
convertible at market determined rates.
O The imports of materials other than petroleum, oil products,
fertilizers, defence and life saving drugs and equipment always had to
be effected against market determined rates.
O All receipts of foreign exchange were required to be surrendered to
authorized dealers as was the practice hitherto.
O The rate of exchange for the transactions was to be the free market
rate quoted by authorized dealers except for 40% of the proceeds
which would be based on the official rate fixed by the Reserve Bank
of India.

5. O The authorized dealers were required to surrender 40% of their
purchases of foreign exchange to the RBI at official rate. The
remaining 60% could be retained by them for sale in free market
for all permissible transactions.
O The Exporters were also given a choice to retain a maximum of
15% of the export earnings in foreign exchange itself, which could
be utilized by them for their own personal needs.

6. Basic features of LERMS can be stated as follows:
O The exchange rate of the rupee will be determined purely on the basis of
market forces of demand and supply. It may, therefore, also could be
described as “market determination exchange rate system”.
O All receipts whether on current or capital account and of the balance of
payments and whether on government or private account will be converted
entirely at the market rate of exchange.
O NRIs will be permitted to maintain the Residents Foreign Currency
Account (RFCA) to which the entire foreign exchange brought in by them
will be credited. Moreover, those Indians who get receipts from abroad
now can have the benefit of getting the entire foreign currency credit to
them at the market rate.
O Exporters and the recipients of inward remittances are required to surrender
the foreign currency received by them to the authorized dealers in foreign
currency. However, they are allowed to maintain 15% of the receipts, in
foreign currency account with an authorized dealer.

7. CONT…Feature
O There is no obligation on the authorize dealers to sell any portion
of their foreign currency receipts direct to the Reserve Bank as was
the case so far. They can sell the receipts in the Indian Market
either to other authorized dealers or for any permissible
transactions.
O Foreign currency remittances abroad are subject to the exchange
control regulations, Of Course, it does not mean that the Reserve
Bank of India's permission would be required in every case.
O The intervention currency of the Reserve Bank continues to be US
Dollar. It may at its discretion buy and sell US dollars from/to
various authorized dealers.

8. Modified Liberalized Exchange Rate Management
System (Modified LERMS)
O The process of liberalization continued further and it was
decided to make the Rupee fully floating with effect from March
1, 1993.
O The new arrangement is called Modified Liberalized Exchange
Rate Management System or Modified LERMS.

9. Salient features are as under:
O Effective March 1, 1993, all foreign exchange transactions, receipts and
payments, both under current and capital accounts of balance of payments are
being put through by authorized dealers at market determined exchange rates.
O Authorized dealers are free to retain the entire foreign exchange surrendered
to them for being sold for permissible transactions and are not required to
surrender to the Reserve Bank any portion of such receipts.
O Foreign exchange receipts are to be surrendered to the authorized dealers
except in cases where the residents have been permitted by RBI to retain them
either with the banks in India or abroad.
O Reserve Bank of India, under Section 40 of RBI Act, 1934, was obliged to
buy and sell foreign exchange to the authorized dealers.
O Reserve Bank is now required to sell any authorized person at its
offices/branches US Dollars for meeting foreign exchange payments at its
exchange rates based on the market rate only for such purposes as are
approved by the Central Government.

10. Advantages of the New System :-
O The system seeks to ensure equilibrium between demand and supply with
respect to a fairly large subset of external transactions.
O It has facilitated removal of several trade restrictions and granted relaxation
in exchange control (under current account transactions).
O It is a step towards full convertibility of current account transactions in
order to achieve the full benefits of integrating the Indian economy with the
world economic system.
O The incentives to exporters will be higher and more particularly to those
whose exports are not highly import intensive. Exporters of agricultural
products will find exports attractive.

11. O A large number of expatriates, who are hitherto denied any advantages on
their remittances to India in line with the earnings of the exporters, are now
eligible for market rate for the full amount of remittances being in the
nature of capital inflows.
O This system, coupled with the exchange control relaxation in certain areas,
and the abolition of travel tax is expected to make the havala route less
tempting.
O In this context it needs to be remembered that smaller the gap between the
average rate received by the exporters and other earners of foreign
exchange and the market rate, the lesser will be the temptation to continue
using illegal channels for remittances.
O In the fiscal area, customs revenue is likely to be higher, other things being
the same, to the extent the valuation of imports would be based on the
market exchange rate. It is, however, necessary to ensure that the tariff
rates together with higher input values do not result in a sharp increase in
import costs.