Question

Choose any one country’s currency that you are interested in. Write down how the currency’s exchange rate policy has been changed over the last 5 decades, at least from the late 1960s. You can find the history of a currency through Google or Wikipedia search. Your answer must not be over 2 pages in length.

Answer 1

The currency that would be discussed is the Indian Rupee. The Indian exchange rate policy has gradually evolved over the period of time with its evolution mirroring the progress in the Indian economy and introduction of reforms in the economic system.

From India’s independence in 1947 till about 1971, the par value of Rupee was considered fixed and was indexed to gold with Pound Sterling acting as the currency of intervention. Post the breakdown of the Bretton Woods system in 1971, the indexation between Rupee and Pound Sterling was made even stronger with Rupee being directly linked to the Sterling.

Furthermore the Reserve Bank of India (RBI), which is the India’s central bank and the custodian of the monetary system in India wanted to ensure stability of the Indian Rupee and felt that pegging the currency to a single foreign currency is risky and can lead to volatility. Then RBI decided in 1975 that Rupee should be pegged to a basket of currency and the selection of currencies which comprised the basket was RBI’s prerogative. This was kind of managed currency system wherein RBI would intervene to keep the value of Rupee pegged at a certain level.

From 1975 till 1991, this system continued and RBI managed the external value with lot of restrictions and constraints on undertaking foreign exchange dealings.

Then in 1991, India faced what is called the Balance of Payments crisis, wherein India did not have adequate forex reserve to pay for its imports. Then government decided to devalue the currency and liberalise the economy. Several entry barrier were done away with and the currency was devalued by 9% in 1^st step and 11% in the second step. Then gradual transformation to a market linked exchange rate was undertaken and currently, the value of Indian Rupee is determined by the market forces.

However, the RBI still undertakes open market operations and intervenes in the market to prevent a steep rise or fall in the value of Rupee and to reduce volatility from time to time. Thus the Indian Rupee management system by RBI is an example of a managed float wherein the value is determined by market forces, however government intervention is there to reduce abnormal volatility.