Scribd Logo
Upload

Welcome to Scribd!

  • 270 views

    Foreign Exchange Rate and Policies

    Uploaded by

    bharat
    This document discusses India's foreign exchange rate policies from independence to present. It begins by defining exchange rates and how they relate to a country's balance of payments. It then outlines India's exchange rate regimes over time, starting with a fixed peg to the British pound, then moving to a basket peg in 1975. Major events included devaluations in 1966, 1991 and 1992 reforms introducing a dual rate system. Currently India has a market-based floating exchange rate determined by supply and demand.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Foreign Exchange Rate and Policies

    Uploaded by

    bharat
    270 views24 pages
    This document discusses India's foreign exchange rate policies from independence to present. It begins by defining exchange rates and how they relate to a country's balance of payments. It then outlines India's exchange rate regimes over time, starting with a fixed peg to the British pound, then moving to a basket peg in 1975. Major events included devaluations in 1966, 1991 and 1992 reforms introducing a dual rate system. Currently India has a market-based floating exchange rate determined by supply and demand.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses India's foreign exchange rate policies from independence to present. It begins by defining exchange rates and how they relate to a country's balance of payments. It then outlines India's exchange rate regimes over time, starting with a fixed peg to the British pound, then moving to a basket peg in 1975. Major events included devaluations in 1966, 1991 and 1992 reforms introducing a dual rate system. Currently India has a market-based floating exchange rate determined by supply and demand.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    270 views24 pages

    Foreign Exchange Rate and Policies

    Uploaded by

    bharat
    This document discusses India's foreign exchange rate policies from independence to present. It begins by defining exchange rates and how they relate to a country's balance of payments. It then outlines India's exchange rate regimes over time, starting with a fixed peg to the British pound, then moving to a basket peg in 1975. Major events included devaluations in 1966, 1991 and 1992 reforms introducing a dual rate system. Currently India has a market-based floating exchange rate determined by supply and demand.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 24

    Foreign

    Exchange Rate
    Policies in India
    Contents
    • Meaning of Foreign Exchange Rate
    • BOP and Forex
    • Terms
    • Fixed exchange rate
    • Flexible Exchange rate
    • Evolution of Forex
    • Exchange rate policy
    • India’s Exchange rate policy- Chronology
    Meaning of Exchange rate
    • A rate at which the currency of one country is
    converted into another currency is called “Exchange
    Rate” or “Nominal Exchange Rate(NER)”.
    • Real Exchange Rates:- The rate at which the goods
    and services of one country is traded for the goods
    and services of another country.
    • Real Exchange rate= NER * Domestic Price
    Foreign Price
    Balance of Payment and
    Exchange Rate
    • Balance of Payment – the record of all
    transactions of the residents with the rest of the
    world
    • Trade balance – Balance of exports and imports
    of goods – exports are positive and imports are
    negative
    • Current account balance – Balance of trade in
    goods, (trade balance), trade in services and
    transfer payments
    • Balance in services includes freight, royalty payments,
    interest payments, dividend from assets abroad
    • Transfer payments include remittances, gifts and grants
    • Capital account balance – purchase and sale of assets
    – stocks, bonds, land – purchase by Indians of assets
    abroad is negative, purchase of assets by foreigners in
    India (e.g., FDI) are positive
    • Current account + Capital account = 0
    • Increase in official reserves is called overall BOP surplus
    Terms
     Devaluation – the price of foreign currencies under a fixed
    exchange rate regime is increased by official action
     Revaluation - the price of foreign currencies under a fixed
    exchange rate regime is decreased by official action

     Depreciation – under a floating rate system, price of foreign


    currencies decreases because of market adjustment
     Appreciation - under a floating rate system, price of foreign
    currencies decreases because of market adjustment
    Fixed Exchange Rate
     In a fixed exchange rate system – foreign central
    banks buy and sell their currencies at a fixed price in
    terms of the domestic currency
     Prior to 1973, most countries had fixed exchange rates
    against each other
     A fixed exchange rate acts like a price support system
     In order to maintain a fixed exchange rate, the central
    bank has to make up for the excess demand or take up
    the the excess supply of foreign currency.
    Flexible Exchange Rate
     In a flexible exchange rate system, the central
    bank allows the exchange rate to adjust to equate the
    supply and demand for foreign currency. In effect
    since 1973
     Clean floating – the central bank stands aside
    completely and allows the exchange rate to be freely
    determined in the forex market – official reserve
    transactions are zero
     Managed float - the central bank intervenes to buy
    or sell foreign currencies periodically in an attempt to
    influence the exchange rates
    Foreign Exchange Market
    In India, the Foreign Exchange Market is a three-
    level structure consisting of
    (a)Reserve Bank of India(RBI) at the top
    (b) Authorised Dealers licensed by RBI
    (c) Customers (exporters, importers, companies and
    other exchange earners).
    The authorised dealers are governed by the
    guidelines framed by the Foreign Exchange
    Dealers Association of India(FEDAI).
    Evolution of Foreign Exchange
    PRE INDEPENDENCE:
    • Exchange control was implemented in India on
    September 3, 1939.
    • The objective was mainly to regulate demand for
    foreign exchange for various purposes, within the
    limit set by the available supply.
    • It lacked depth and liquidity.
    POST INDEPENDENCE:
    FERA (Foreign Exchange Regulation
    Act),1947:
    • Enacted by British regime as a temporary measure.
    • The limited objective: To regulate the inflow of foreign
    capital.
    • During this period the exports was not picking up
    while imports were high.
    • The foreign exchange policy during the 1950’s was to
    manage the exchange rate mainly for facilitating
    India’s imports.
    • The Bretton Woods System(1946-1971)
    – Member countries need to fix the parities of their
    currencies in terms US dollars or gold.
    – The countries were obliged to keep fluctuations in
    their currency within +/- 1% of the declared parity.
    – IMF’s approval required to devaluate the currency.
    – US $35= an ounce of gold
    • Collapse of Bretton Woods System
    – Persistent and very high American balance of
    payments deficit.
    – High inflation rate in USA in 1970-71
    – Market perception-Insufficient gold reserves
    by USA to massive supply of US dollars
    – US announced on 15 august, 1971 not to
    convert US $ into gold at the fixed rate as
    committed to IMF
    FERA(Foreign Exchange Regulation
    Act0,1973:
    • Government of India reviewed FERA, 1947 for
    conserving foreign exchange rather than
    regulating the entry of foreign capital.

    • As a crisis-driven legislation, the FERA,1973


    naturally contained several draconian
    provisions. Any offence under FERA was a
    criminal offence liable to imprisonment.
    Foreign Exchange Management
    Act(FEMA),1999:
    • The main objective: To facilitate external trade
    and payments and promote the orderly
    development and maintenance of the foreign
    exchange market in India.

    • Law violators are treated as civil offenders rather


    than criminals.
    Foreign exchange policy initiatives since
    1991
    From the Floating system under which the
    exchange rate was officially determined the
    regime has passed through several phrases to
    reach the present Market- based system under
    which Exchange rate is determined by forces of
    demand and supply.
    Introduction of (LERMS),1992.
     LERMS – Liberalized Exchange Rate
    Management System , partial convertibility of
    the rupee was introduced in the form of a dual
    exchange rate system
     The rate of exchange for conversion of 60% of
    the proceeds of the transactions was the
    market rate quoted by the Ads while
    remaining 40% of the proceeds were
    converted at the RBI’s official rate.
    Exchange Rate Policy
    Synchronization
     If policies are not synchronized between countries, they
    may pose a major threat to free trade
     When import prices fall due to currency appreciation, large
    shifts in demand will occur – domestic workers become
    unemployed – leads to pressure for protection – tariff and
    quotas
     Flexible exchange regime calls for more interdependence
    than fixed exchange rate.
     Through international coordination of interests and policies,
    the system works better
     Regular consultation between major currencies
    Exchange rate of rupee with US $
    India’s Exchange rate policy-
    Chronology
    Year

    1947: Rupee tied to pound. Rs 1= 1s

    18 September, Pound devalued; India maintained par with pound


    1949

    6 June, 1966 Rupee is devalued, Rs 4.76 = $1, after devaluation, Rs


    7.50 = $1 (57.5%)
    18 November, UK devalued pound, India did not devalue
    1967

    August 1971 Rupee pegged to gold/dollar, international financial crisis


    Conti…
    18 December, Dollar is devalued
    1971

    20 December, Rupee is pegged to pound sterling again


    1971

    1971-1979 The Rupee is overvalued due to India’s policy of import


    substitution
    23 June, 1972 UK floats pound, India maintains fixed exchange rate with
    pound
    1975 India links rupee with basket of currencies of major trading
    partners. Although the basket is periodically altered, the link
    is maintained until the 1991 devaluation.
    July 1991 Rupee devalued by 18-19 %
    March 1992 Dual exchange rate, LERMS, Liberalized Exchange Rate
    Management System

    March 1993 Unified exchange rate: $1 = Rs 31.37

    1993/1994 Rupee is made freely convertible for trading, but not for
    investment purposes
    References
    • Economic survey of India: 1947-48 to 2008-09 by
    Dr. Chandra Shekhar Prasad.
    • Sixty years of Indian economy:1947 to 2007
    • Indian Currency system
    • CMIE(Centre for Monitoring Indian Economy)
    • www.economypedia.com
    • Seniors
    Thank You

    You might also like