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Evolution of India's exchange rate regime

Author

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  • Ashima Goyal

    () (Indira Gandhi Institute of Development Research)

Abstract

The paper analyzes the changing INR trends over the reform period, in the context of fundamental determinants of exchange rates. In the early reform years the chief concern was to limit appreciation from inflows, and from higher domestic inflation, given the trade deficit. So short-term nominal depreciation maintained a long-term real fix. But with two-way nominal variation, more objectives can be accommodated. We ask how the exchange rate contributed to three possible policy objectives-maintaining a real competitive exchange rate, neutralizing inflationary oil shocks, deepening foreign exchange markets and encouraging hedging. Depreciation allowed just before oil prices crashed compromised the second objective. Inadequate commitment to two-way movement, prior to the crisis, induced firms to take large currency exposures based on expected appreciation. After the crisis, capital flows were allowed to drive the exchange rate, aggravating inflation and acting against macro stabilization. Markets need some guidance to achieve policy objectives.

Suggested Citation

  • Ashima Goyal, 2010. "Evolution of India's exchange rate regime," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2010-024, Indira Gandhi Institute of Development Research, Mumbai, India.
  • Handle: RePEc:ind:igiwpp:2010-024
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2010-024.pdf
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    Cited by:

    1. Vikas Gautam & Suresh K G & Aviral Kumar Tiwari, 2013. "Impact Of Real Exchange Rates On Exports Of Agricultural Commodities: Evidence From India," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 11, pages 46-58, June.
    2. Somesh Kumar Mathur & Surendra Babu, 2014. "Modelling & Forecasting of Re/$ Exchange rate – An empirical analysis," 2nd International Conference on Energy, Regional Integration and Socio-Economic Development 7741, EcoMod.

    More about this item

    Keywords

    Exchange rate regimes; stabilization; inflation; markets; capital flows; hedging;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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