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Analyzing India's Exchange Rate Regime

Author

Listed:
  • Patnaik, Ila

    (National Institute of Public Finance and Policy)

  • Sengupta, Rajeshwari

    (Indira Gandhi Institute of Development Research)

Abstract

We analyze India’s exchange rate regime through the prism of exchange market pressure. We estimate the various regimes that India’s de facto exchange rate has been through during the period 2000 to 2020. We find four specific regimes of the Indian rupee differentiated by the degree of flexibility of the exchange rate. We document the manner in which the Exchange Market Pressure (EMP) Index in India has either been resisted through foreign exchange market intervention, or relieved through exchange rate change, across these four de facto exchange rate regimes. In particular, we find that after the 2008 Global Financial Crisis, the rupee-dollar exchange rate was relatively more flexible and the share of the exchange rate in EMP absorption was the highest. After 2013, there was a change in the way the EMP was absorbed. The exchange rate was actively managed using spot as well as forward market intervention. We also find that the response of the Reserve Bank of India (RBI) to EMP has been asymmetric. When there has been pressure to appreciate, the RBI has typically responded by purchasing reserves. On the other hand, during the periods in which there has been pressure to depreciate, only a tiny fraction of the reserves were used for resisting the pressure. Such pressure is absorbed by rupee depreciation.

Suggested Citation

  • Patnaik, Ila & Sengupta, Rajeshwari, 2022. "Analyzing India's Exchange Rate Regime," India Policy Forum, National Council of Applied Economic Research, vol. 18(1), pages 53-85.
    • Handle: RePEc:nca:ncaerj:v:18:y:2022:i:2022-1:p:53-85
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    2. Mukherjee, Sacchidananda, 2021. "Revenue Shortfall and GST Compensation: An Assessment," Working Papers 21/356, National Institute of Public Finance and Policy.
    3. Siddiqui, Aaliyah & Kautish, Pradeep & Sharma, Rajesh & Sinha, Avik & Siddiqui, Mujahid, 2022. "Evolving a policy framework discovering the dynamic association between determinants of oil consumption in India," Energy Policy, Elsevier, vol. 169(C).

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    More about this item

    Keywords

    Exchange Rate Regime; Forex Intervention; Reserves; Exchange Market Pressure; Structural Change;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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