The Extent of Exchange Rate Flexibility in India: Basket Pegger or Closet US Dollar Pegger?
This paper examines the degree of de facto exchange rate flexibility for India over the last two decades. While there is a diversity of methods that measure de facto exchange rate regimes, none individually encapsulate all the applicable characteristics of an actual regime. It is therefore essential to employ a range of measures so that as many of the salient characteristics are captured, as well as to ensure the robustness of the results. While the Reserve Bank of India (RBI) is commonly believed to target the real effective exchange rate (REER), the results in this paper indicate that the Indian rupee is predominantly influenced by the US dollar, with the euro slowly gaining in significance as well.
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