Foreign exchange market and exchange rate policy – study of India's journey post independence

With the spread of globalization and liberalization of world economies, the level of interdependence among economies in world has increased at a very fast pace. An important factor forming base of all international transactions is Exchange rates. The objective of this paper is to trance India's experience of exchange rate management against the backdrop of various national and international developments since independence. It is appropriate to quote that neither a single exchange rate regime is appropriate for all countries in the world nor an exchange rate regime which is appropriate for a country at one time may remain appropriate all time for it. In the post independence period India's exchange rate policy has seen a shift from a Par value system of IMF during 1950s and 1960s to a Basket Peg during 1970s and 1980s and eventually culminating in the present form of a market determined exchange rate regime since March 1993. Reserve Bank of India, the apex banking institution of India, has been actively participating in the market dynamics with the purpose of maintaining orderly conditions in foreign exchange market. This study makes an attempt to explain major factors affecting the dynamics of exchange rate. India's journey has been traced by explaining chronology of exchange rates systems prevailed in India, movement of Indian Rupee over years and Central Bank intervention through buying and selling of currency.