Question

Study the exchange rate policy of one country (or one group of countries) of your choice and write a short report on what they did (fixed/pegged/floating/other interventions…) and their possible motivations (i.e. costs/benefits). The report should be 1-2 pages long with normal text size and line spacing.

Answer 1

   Exchange Rate Policy of INDIA

              
Before exploring the exchange rate policy of any country we first know what the basic concept of exchange rate is. An exchange rate is the value of one currency comparing with other. Exchange rate policy is all about managing forex market.

Background of Indian forex policy-
We can divide the Indian foreign exchange market into two categories first one is before 1991 period and other one is after 1991.

Before 1991 period there were high restrictions on transactions, instruments and participants. Less exposure was there for investors and lot of critical rules was there. Since independence India’s exchange rate has policy has changed from a par value system to basket-peg and further to a managed float exchange rate system. During 1971 Indian rupee was linked with pound sterling. To overcome the single currency dependency India opted for a basket of currencies from 1975 till 1990s. In 1991 when LPG (liberalization, privatization, globalization) policy implemented in India. To counter forex reserve problem and boost confidence of investors India went for Liberalized exchange rate system (LERMS). In 1992 a dual exchange rate system put in place for short period. This system is replaced by a Unified exchange rate system in 1993. Till now we can say that it is satisfactory and effectively managed by timely steps taken by the regulators and governments.

Law and interventions in foreign exchange
In India foreign exchange is managed by Foreign exchange Management Act 1999. It replaced Foreign exchange regulation Act 1973. In India Reserve bank of India take care of foreign exchange. It control the currency movement by different method and also sell and purchase foreign currency.

Present Exchange rate policy scenario
After trying so many methods since independence India now in the floating rate system. Because of insufficient forex and high debt obligation India cannot go for fixed rate system. In current scenario when USD is improving India trying to recover and moving in good direction